General Mills (NYSE:GIS) reported earnings yesterday and popped about 3% as a result. Despite higher input costs thanks to rising food and fuel prices, General Mills handily beat profit forecasts and raised its full-year outlook.
This pop gives the Cheerios maker year-to-date returns of over 25% — almost double the S&P 500 — and proves yet again that consumer staples stocks are not just sleepy dividend payers destined to muddle through.
Bigger picture, consider five-year returns for the Consumer Staples SPDR (NYSE:XLP). Not counting dividends, this staples ETF is up 40% since March 2008 — over three times the performance of the S&P 500. Ten-year returns also boast impressive outperformance, with more than a 110% gain for the XLP fund vs. about 80% for the S&P.
Hopefully this shows that consumer staples are crucial for any portfolio. Sure, they are recession-proof since people need to buy diapers and toothpaste and pasta even when economic conditions turn south. But there is also big growth potential in a number of players here — if you know where to look.
I think General Mills may be a bit frothy after its recent run … and, of course, the inflation risk remains a concern since rising costs of food and energy could eat into profit margins. However, I think the long-term power of this sector is clear. Here are three consumer staples stocks worth a look:
Kimberly-Clark (NYSE:KMB) is the company behind brands that include Kleenex, Huggies and Cottonelle. KMB’s five-year growth rate is admittedly flat, but recently things have started to turn around, with earnings expanding despite sleepy sales growth.
For instance, fiscal 2013 should see EPS numbers grow by 26% over 2012 numbers. Return on equity is also an impressive 33.8% (ttm), significantly above many other staples stocks.
The forward P/E is below 16 right now, which is a bit high but reasonable. And yes, the company is near a 52-week high after a big run to start the year … but don’t let that scare you out of a long-term position. The 10-year return in KMB is over 100% and the five-year return is nearly 50%, so you may have to wait a long time for a significant pullback.
Furthermore, Kimberly-Clark has doubled its dividend from roughly 9.5 cents in 2005 to 19 cents a quarter currently. That’s good for a 2.8% yield.
KMB reports earnings April 18.
Coca-Cola Company (NYSE:KO) is finally getting back to levels it saw in mid-2012 right before splitting 2-for-1. While performance since those August highs hasn’t been grand, the company appears to be getting its groove back and is ripe for a purchase.
You’d be hard-pressed to find a better-run operation, with Coke seeing year-over-year revenue increases like clockwork every single quarter dating back at least four fiscal years. The five-year growth rate for sales is almost 12% despite an already dominant brand. Earnings continue to move higher too, with an 11% bump in earnings forecast for FY2013.
The valuation is a bit pricey at a forward price-to-earnings of about 17, but the stock is just a short run away from an all-time high of around $43.50 (adjusted for splits) and could continue to run.
And don’t forget the stability created 2.8% dividend, or the nearly $15 billion Berkshire Hathaway (NYSE:BRK.B, BRK.A) has invested in this consumer staples giant. Oh yeah, Coke also has a pretty popular soft drink that doesn’t seem to be going anywhere anytime soon…
Coca-Cola reports earnings April 15.
ConAgra Foods (NYSE:CAG) is the parent of Chef Boyardee pasta, Swiss Miss hot chocolate, La Choy Asian foods and a host of others. CAG stock just set another 52-week high, and ConAgra continues to break out despite an already impressive 12-months return of 35% (triple the S&P 500).
This company is the most attractive staples stock on a price-to-earnings basis, trading at a multiple of less than 15. It also boasts the most impressive 2013 earnings projection, from adjusted EPS of $1.12 in last year to forecasts of $2.15 this year — almost double the profits.
The dividend, which has been paid since 1976, is 2.8%, and at 25 cents a quarter it’s very sustainable at less than half of profits.
The company has seen nine straight quarters of year-over-year revenue growth. And if the half-dozen recent upward revisions in EPS estimates are any sign, ConAgra stock could see an impressive earnings report in a few weeks.
ConAgra Foods reports earnings April 2.
- On the contrarian side, Daniel Putnam wondered recently if overvalued stocks in the sector could be in trouble. (InvestorPlace)
- Why the surge in consumer staples stocks shouldn’t scare you off buying. (The Tell via MarketWatch)
- Robert Ciura offers his favorite staples plays — KMB, but also Clorox (NYSE:CLX) and Colgate-Palmolive (NYSE:CL). (The Motley Fool)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.