The term "grandma stock" is used to describe defensive stocks that most commonly consist of companies that produce reliable consumer staples. These companies generally fare well regardless of general economic and market conditions because their goods are always in demand. As with all companies, some fare better than others and some occasionally break the mold of tempered gains relative to the overall market. This year was a great year for both the market as a whole and for grandma stocks. Hershey Company (HSY 0.32%) outshined the rest as my pick for the top grandma stock of the year, followed closely by Clorox (CLX +1.03%).
Total return
Hershey outperformed and Clorox matched the performance of the S&P 500 this year. Through Dec. 30, Hershey yielded a total return of over 33% and Clorox yielded a total return of 29%, matching the S&P 500's total return for the year. Though both companies have low betas (Hershey has a beta of only 0.20!), they were both able to perform at levels even with and above the market.
HSY Total Return Price data by YCharts
Grandma stocks appeal to investors because of their lack of volatility which stems from their consistent offering of consumer staples. This characteristic implies longevity, and as these companies have been around for a long time they have provided investors with consistent dividends. The Hershey Company was founded in 1894, and its shares have been traded publicly since 1985. From its very beginning on the New York Stock Exchange, Hershey has provided a steadily increasing dividend, which now amounts to a yield of over 2%.
Clorox does not have quite as long of a history as Hershey does, but Clorox has nonetheless committed itself to offering investors value in the form of dividends. The Clorox Company has been around for over a century, and it has been independent of The Procter & Gamble Company (PG +2.46%) since 1969. Since their separation, both companies have continued to offer dividends, with the P&G dividend increasing to its current level of 3.5% and the Clorox dividend steadily increasing over the years to its current level of over 3% annually. While both companies performed solidly throughout 2013, P&G performed at a level mostly consistent with its beta of ~0.5, while Clorox overachieved compared to the gains one might expect from its small beta.
Continuing to grow
The potential downfall for many grandma stocks is the companies' unwillingness to adapt and, in-turn, grow as the market changes. While chocolate and bleach are products that consumers are willing to buy in any economic conditions, these products do not provide these companies with the potential to experience huge growth. Fortunately, Hershey and Clorox break the mold of more traditional grandma stocks, which led to the growth and subsequent returns that they realized in 2013.
The Hershey Company markets its 80+ brands to over 60 countries. Over the years the company has made numerous acquisitions and it has at times expanded beyond the world of chocolate into and out of cough drops and pasta. Though constantly exploring suitable acquisitions, the company's base as the largest chocolate manufacturer in North America enables high margins through efficient operations.
While Clorox is best known for its namesake bleach product, the company also manufactures food products, other cleaning products, and disparate other chemical products. What separates Clorox from other grandma stocks and gives the company promise for long-term growth at a rate beyond that suggested by its meager beta of 0.5 is its commitment to continued research and development. Clorox spends in excess of $100 million annually on new product development and product innovation, as well as R&D on enhanced process technologies to ensure that the company remains the dominant manufacturer of their staple goods.
Looking forward
Hershey Company and Clorox go beyond the expectations for traditional grandma stocks by providing returns greater than the market as a whole. Emphasis on diverse product offerings and new and existing product development combined with the sheer size and history of these companies to make for stocks that provided investors great returns in 2013. Looking forward, both of these companies stand to fare well in the following years as well.
