COVID-19 has provided the market with a prime example of why investors should be open to consumer staples stocks. During the 11-year bull market that ended last month, consumer staples have generally been unexciting investments, with low growth, high-valuation multiples, and decent but not spectacular dividends. However, with the current coronavirus outbreak and state-imposed quarantines, we're all getting a lesson why consumer staples stocks can make great investments for risk-off portfolios for those near retirement.
Diversified consumer staples conglomerates sell things that people use everyday in their homes, such as toilet paper, paper towels, chips, sodas, soap, soup, and other items we're all using a lot more of these days. And because of the unique nature of the COVID-19 downturn, cleaning products are likely even more in demand than they otherwise would be in a typical recession.
In that light, here are a few consumer staples stocks to consider for your dividend portfolio during the quarantine period and beyond.
Though known for its namesake Pepsi brand, PepsiCo (NASDAQ:PEP) has a product portfolio almost evenly divided between snacks and beverages. Analysts think that its high-margin Frito-Lay division may benefit this quarter from consumers stocking up on chips amid the recent quarantines, and they've also cheered the company's strong balance sheet, which should insure the stability and growth of Pepsi's 3.1% dividend.
In addition, Pepsi has a strong beverage portfolio, not only with its namesake Pepsi brand, but also with new addition Bubly, which has made a name for itself in the high-growth sparkling-water market. Pepsi also owns the Gatorade sports drink brand, which consumers may also be stocking in order to have a hydrating, electrolyte-rich beverage on hand in case they get sick. Finally, Pepsi just made a big move in March by scooping up Rockstar Energy for $3.85 billion.
And in a show of strength, PepsiCo also recently announced it would be hiring 6,000 full-time employees amid the outbreak, in addition to raising pay for 90,000 front-line employees by at least $100 per week.
PepsiCo currently trades at a very reasonable 25 times earnings. On its latest earnings release, management predicted 4% organic revenue growth and 7% EPS growth in constant currency for 2020. It's unclear how much that will change with COVID-19, but Pepsi's earnings should be relatively solid as it gets through the year.
Procter & Gamble
In difficult times, it's usually a good idea to go with the largest and strongest leaders in any particular sector. For consumer staples, that means Procter & Gamble (NYSE:PG). The Cincinnati-based consumer goods giant holds an admirable portfolio, including Tide detergent, Comet cleaners, Head & Shoulders shampoo, Crest toothpaste, and many other products that consumers will use regularly, recession or not.
Not only is Procter & Gamble the largest consumer staples stock in the world, with a market capitalization of around $291 billion, but it's also among the fastest growing. Last quarter, Procter & Gamble's organic revenue grew 5%. Thanks to a years-long efficiency effort, earnings per share grew 15% on a constant-currency basis. P&G currently trades at about 21 times 2020 earnings projections and sports a dividend yield of 2.5%. While that dividend may not be the most exciting, a 2.5% dividend that's likely to grow every year looks a heck of a lot better than a 10-year Treasury note yielding a measly 0.74%.
Finally, Unilever (NYSE:UL) is another large staples company. Based in the Netherlands, Unilever has a market capitalization of $135 billion, and the stock trades at a very reasonable 20.3 times earnings, with a dividend yield of 3.63%. If worried about another downturn, that's a very reasonable price to pay for this consumer staples giant, home to Hellmann's mayonnaise, Lipton tea, Breyer's ice cream and Axe body spray. But perhaps the most important brand to Unilever is Dove soap, the most popular soap brand in the U.S. and U.K.
It's highly likely that during the COVID-19 outbreak, people will be washing their hands more often, which will mean they'll run through soap faster. If that theory proves correct, Unilever's Dove brand stands to benefit the most.
Unilever has also been operating well as of late. Last year, sales grew 2.9%, but underlying operating margin (adjusted for an accounting change) expanded 50 basis points, with underlying earnings per share growing at a greater 8.1%. Unilever has been streamlining its business over the past few years, and that solid profit expansion shows the fruits of those efforts. With soap sales set to rise amid the outbreak, Unilever looks like another solid consumer staples pick, and with a very nice dividend to boot.