The Consumer Staples sector consists of companies that provide essential products. In other words, Consumer Staples are products that people cannot or are unwilling to do without. As a result of the essential nature of Consumer Staples, there are several attributes that distinguish this sector from most others. First of all, the essential nature of the products that Consumer Staples’ companies produce, are for the most part, non-cyclical. Second, Consumer Staples tend to be very insensitive to economic cycles. Therefore, their businesses tend to remain strong and healthy even during recessions.
Because of the stability and consistency that many Consumer Staple companies possess, you will find many of the bluest of blue-chip companies within this sector. However, finding these blue-chips at attractive valuations is often difficult or rare. The best-of-breed Consumer Staples companies often command quality premiums relative to companies in other sectors with equivalent fundamental attributes. To state this more simply, moderate overvaluation relative to intrinsic value based on cash flows and earnings is very common for companies in this sector.
Since I am such a stickler for valuation, I am not willing to pay more for even the best company than I believe it is worth, based on fundamental values. Consequently, several of the best-of-breed Consumer Staples companies were cut from my list based solely on valuation. To be clear, many of these stocks are currently trading at historical normal valuations, but above what I would consider to be their intrinsic value. Since this moderate overvaluation tends to be the norm with these companies rather than the exception, some prospective investors might be willing to pay the premiums for many of these names, but not me.
The dividend stalwarts that I’ve excluded based on what I’ve stated above are listed in alphabetical order as follows: Colgate-Palmolive Company (NYSE:CL), The Clorox Co (NYSE:CLX), Campbell Soup Company (NYSE:CPB), Flowers Foods, Inc. (NYSE:FLO), General Mills, Inc. (NYSE:GIS), Kimberly Clark Corp (NYSE:KMB), The Coca-Cola Company (NYSE:KO), PepsiCo, Inc. (NYSE:PEP), The Procter & Gamble Company (NYSE:PG) Reynolds American, Inc. (NYSE:RAI), The J.M. Smucker Company (NYSE:SJM), SYSCO Corporation (NYSE:SYY), Unilever plc (NYSE:UL) and Unilever N.V. (NYSE:UN).
To be clear, most of the names cited above are currently trading at historically normal premium valuations. Consequently, I consider them overvalued, and therefore, they were excluded. Another interpretation can simply be that these are quality blue-chips worthy of the premium valuations that the market is currently awarding their shares. In other words, all of the names cited above could be included as retirement portfolio candidates for the prudent dividend growth investor willing to pay a premium price for quality.
Procter & Gamble: A Classic Example of Premium Valuation
The following earnings and price coerelated graph on Procter & Gamble illustrates how the market tends to price this blue-chip at a premium. The orange line on the graph represents an fair value earnings justified PE ratio of 15, and the dark blue line represents the historical normal PE ratio of 19.5 that the market has typically valued Procter & Gamble at.
Furthermore, we see that the Great Recession of 2008 did bring Procter & Gamble’s price down to its earnings justified level and stayed there through much of 2012. However, with the bull run in 2013, Procter & Gamble’s share price has now returned to its historical normal PE ratio. Consequently, it could be argued that buying Procter & Gamble today at its historical normal PE makes a certain amount of sense. Even though the price was adjusted downward during the recession, it has since moved back into alignment with its historical normal value. However, I have never been able to make myself pay more for a company than I believe it is worth. For disclosure, I bought Procter & Gamble after it reverted to the mean, and still hold it currently.
The following estimated earnings and return calculator defaults to valuing Procter & Gamble based on the consensus of 27 analysts forecasting 5-year earnings growth at 9% (the dark orange line). However, utilizing the PE overlay feature of FAST Graphs™, I have included the historical normal PE ratio of 19.5. In other words, based on estimates that are consistent with Procter & Gamble’s historical growth, it would be fairly valued based on its historical normal PE, but overvalued based on my definition of True Worth™.
The Consumer Staples Sector
This is the sixth in a series of articles designed to find value in today's stock market environment. However, it is the fifth of 10 articles covering the 10 major general sectors. In my first article I laid the foundation that represents the two primary underlying ideas supporting the need to publish such a treatise. First and foremost, that it is not a stock market; rather it is a market of stocks. Second, that regardless of the level of the general market, there will always be overvalued, undervalued and fairly valued individual stocks to be found.
My first article was titled Searching For Value Sector By Sector, my second article was titled Finding Great Value In The Energy Sector. My third article was titled Finding Value In The Materials Sector Is A Material Thing. My fourth article was titled The Industrial Sector Offers A Lot Of Value, Dividend Growth And Income, and my fifth article was Beware Of The Valuations On The Best Consumer Discretionary Dividend Growth Stocks.
As a refresher, my focus in this and all subsequent articles will be on identifying fairly valued dividend growth stocks within each of the 10 general sectors that can be utilized to fund and support retirement portfolios. Therefore, when I am finished, the individual investor interested in designing their own retirement portfolio should find an ample number of selections to properly diversify a dividend growth portfolio with.
This article will look for undervalued and fairly valued individual companies within the general sector 30-Consumer Staples. Within this general sector, there are several subsectors which I list as follows:
Consumer Staples In Value: Aggressive Candidates
As I screened the universe of Consumer Staple companies I did find seven candidates that fit my aggressive criteria. This means that they are not blue-chip dividend stalwarts, but nevertheless appear to be interesting companies that are trading at reasonable valuations with the potential for solid long-term performance. However, as you can see from the portfolio review below, some of these companies are very small, and therefore, additional due diligence and caution is suggested.
Orchids Paper Products Company (TIS): My Featured Aggressive Consumer Staples Company
Orchids Paper Products Company (NYSEMKT:TIS) is a leader in the private label tissue industry, and I’m not sure you can think of a product that most people would consider any more essential than theirs. Consequently, this $210 million company with a 5.2% current yield and a history of above-average growth may be of interest to the more aggressive dividend growth investor.
Since going public in July 2005, Orchids Paper Products Company has generated significant profits and profit growth on behalf of their shareholders. The company’s operating earnings growth rate has averaged 18.6% per annum, and even though they’ve only paid a dividend since 2012, they have been very generous to shareholders, as depicted by the light blue shaded area on the graph below.
Orchids Paper Products Company’s excellent operating history has generated excellent long-term returns for shareholders. A $10,000 investment on July 29, 2005 when the company went public, would be worth $39,468.44 today. That represents an 18.8% compounded annualized return that is almost precisely correlated to the company’s operating earnings growth of 18.6%. Add in their substantial dividend payment over the last two years, and the company has outperformed the S&P 500 by orders of magnitude. Consequently, this may be a small dividend growth stock worthy of further scrutiny for the aggressive dividend growth investor.
Consumer Staples In Value: Conservative Candidates
Even though many of the most well-known conservative blue-chip Consumer Staple companies are currently fully valued as referenced above, I was still able to find several well-known candidates that I feel are currently fairly valued. The following portfolio review lists 12 blue-chip dividend growth stocks currently fairly valued and listed in alphabetical order.
Walgreen Company : “Once Was Lost But Now Is Found”
I chose Walgreen Company (NYSE:WAG) as my first featured Consumer Staples blue-chip dividend growth stalwart because I believe it offers a valuable lesson and insight into the importance of intrinsic valuation. Just like many of the premium valued blue-chips I mentioned in the introduction to this article, Walgreens was a company that the market was routinely pricing