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Investing in Consumer Staples Stocks

By Jeremy Bowman – Updated Jun 8, 2022 at 12:53PM

You may not realize it, but you rely on consumer staples every day. They include daily essentials such as food and beverages, personal care products, household and home care products such as paper goods, and alcohol, tobacco, and cosmetics.

You buy consumer staples regardless of the state of the economy, and the amount you buy is relatively fixed in good times and bad. In this way, the consumer staples sector behaves much differently than consumer discretionary businesses such as restaurants, hotels, and apparel, or consumer durables, which are long-lasting products such as furniture and electronics.

Consumer staples companies may not have the highest earnings growth or year-over-year revenue growth because these stocks tend to be large, mature companies. Historically, the sector has experienced relatively little disruption. But these stocks make up for modest growth with low price volatility, reliable profits, dividends, and defensive positioning.

Parent and child browsing grocery aisle and placing items in blue shopping basket.
Image Source: Getty Images

Advantages of consumer staples stocks

Consumer staples stocks function in a non-cyclical manner, meaning they offer investors safety during recessionary climates. Since these companies sell goods such as food and cleaning products that consumers rely on regardless of the state of the economy, they tend to generate solid profits even in weak economies. For instance, a number of consumer staples companies thrived during the early stages of the COVID-19 pandemic as consumers stocked up on essentials and avoided spending on discretionary purchases such as travel and restaurant meals.

More recently, that spending has shifted back to discretionary categories, weighing on some consumer staples stocks such as Clorox (NYSE:CLX).

Did you know...

Consumer staples are noncyclical, meaning they offer investors safety during recessionary climates.

Some consumer staples stocks are Dividend Aristocrats -- companies that have increased their dividend payouts every year for at least 25 consecutive years. For this reason, consumer staples stocks are often popular with retirees and other investors seeking long-term income and security. Many offer better dividend yields than an S&P 500 (SNPINDEX:^GSPC) ETF, which currently pays a dividend yield of 1.4%.

Because consumer staples companies operate in stable sectors and sell products that are always in demand, the biggest ones have been around for a century or more. Their longevity is a reflection of their brand value, a history of acquiring smaller brands, and their ability to endure a wide range of challenges and economic cycles.

Top consumer staples stocks to buy

Just as you’re familiar with many consumer staples products, you’ll likely be familiar with many of the top stocks in the sector such as Costco Wholesale (NASDAQ:COST), Procter & Gamble (NYSE:PG), PepsiCo (NYSE:PEP), and Estee Lauder (NYSE:EL).

1. Costco Wholesale

Costco doesn’t make consumer staples products, but it sells them -- in bulk. Most of its inventory consists of groceries and household items such as paper products and cleaning supplies. Costco has a number of advantages over its retail peers, largely because its membership model creates a reliable customer base with a retention rate of around 90%. Costco also earns most of its profits from membership fees, so it can offer rock-bottom prices on merchandise, giving it a competitive advantage. Under its Kirkland brand, it sells a wide range of products in categories such as diapers, chocolate, and toilet paper, further leveraging its unique retail position.

The retail stock has prospered during the coronavirus pandemic, with comparable sales growth (an industry metric that factors out new store openings) jumping by double digits and e-commerce sales soaring. Performance has remained strong through fiscal 2022. Even as inflation has wracked other retailers, Costco continues to expand comparable sales by double digits, benefiting from its reputation for bargain prices and its ability to pass on price increases to its customers.

2. Procter & Gamble

Procter & Gamble is best known for its marquee brands such as Tide, Gillette, and Crest. The household and personal care company is almost 200 years old and has 22 brands that generate $1 billion or more in annual revenue. Almost all of those brands hold the No. 1 or No. 2 market share position in their categories, which include paper products, laundry detergent, diapers, and beauty products. P&G is also a Dividend Aristocrat.

The company is currently developing innovative products, including the nontoxic insect repellent Zevo. In 2019, it released a line of plant-based cleaning products called Home Made Simple. After streamlining its business by selling off non-core brands, restructuring, and cutting costs, P&G's position is as strong as it’s ever been.

Like other consumer staples companies, P&G received a healthy boost from the pandemic. Organic sales, which exclude the balance sheet effects of acquisitions, divestitures, and currency exchanges, increased 6% during its fiscal year ending June 30, 2021, and core earnings per share rose 11%. The company's growth in fabric and home care, as well as in health care, was the most robust. For 2022, management forecasts 3% to 6% growth in core earnings per share.

3. PepsiCo

PepsiCo is much more than its namesake beverage brand. The company also owns Frito-Lay and Quaker, as well as popular drink brands such as Mountain Dew and Gatorade. Its Frito-Lay snack business generates almost as much revenue in North America as its beverages, and that business has been a source of growth while soda sales slow in the U.S. and around the world. With its global brands and distribution, Pepsi enjoys many of the same advantages as industry giants P&G and beverage company competitor Coca-Cola (NYSE:KO).

Because of its exposure to the restaurant industry, Pepsi was more affected by the early stages of the pandemic. However, the company began making a solid recovery last year, and it posted 9.5% organic revenue growth in 2021.

Pepsi has also grown through acquisitions. In 2018, it acquired SodaStream, which gave the company a leading position in countertop soda-making. It also bought energy drink maker Rockstar Energy in 2020.

PepsiCo also just became a Dividend King, having raised its quarterly payout for 50 years in a row, which shows that it’s an attractive stock for income investors.

4. Estee Lauder

The cosmetics subsector tends to be more volatile than other parts of the consumer staples industry. That’s because trends in the beauty business, which are subject to broader fashion tastes, tend to change more quickly and attract smaller brands.

Additionally, cosmetics companies were hit harder by the COVID-19 pandemic than most consumer staples businesses because social distancing led to a decline in the demand for makeup and fragrances.

Nonetheless, Estee Lauder has been a top performer, more than doubling the S&P 500’s 90% return over the past five years.

Estee Lauder is the second-biggest pure-play cosmetics company in the world behind L’Oreal (OTC:LRLCY), and it has an impressive array of prestige beauty brands, including Clinique, Aveda, La Mer, and MAC. The company’s recent growth has been driven in large part by its success in the Chinese market, where its skin care products have performed particularly well.

For fiscal 2022, the company expects organic revenue growth of 10% to 13% and adjusted EPS growth of 14% to 17%. Momentum from China’s expanding middle class should help support the company’s growth, making the stock a good choice for investors looking for a mix of high growth and the stability of a traditional consumer staples stock.

Consumer staples ETFs

For investors who prefer exposure to the whole consumer staples sector rather than picking individual stocks, buying shares in an exchange-traded fund (ETF) is the most sensible option. The chart below summarizes three different consumer staples ETFs:

Data source: Yahoo! Finance
Fund Name Expense Ratio
Consumer Staples Select SPDR Fund (NYSEMKT:XLP) 0.1%
Vanguard Consumer Staples ETF (NYSEMKT:VDC) 0.1%
iShares U.S. Consumer Goods ETF (NYSEMKT:IYK) 0.41%

The first two of these three ETFs have Costco, Procter & Gamble, PepsiCo, and Estee Lauder among their top 10 holdings. The iShares U.S. Consumer Goods ETF has both consumer staples and consumer discretionary stocks, including Procter & Gamble, PepsiCo, and Estee Lauder, in its top 10, but it doesn’t own the stocks of retailers.

In addition, all three ETFs own popular consumer staples stocks such as Coca-Cola and the following:

Are consumer staples stocks right for you?

The best consumer staples companies tend to have consistently strong organic sales, leading market shares, and attractive dividend yields. Although the industry sees relatively little innovation and growth, consumer staples products tend to be timeless, and these companies are likely to continue to endure.

Consumer staples companies have an excellent ability to withstand recessions, increase their dividends, and post consistent, incremental growth. All of those characteristics make them good choices for investors looking for reliable, income-producing stocks.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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