There used to be a time when consumer staples stocks were considered indestructible. That was especially true during recessions. However, we aren’t currently in one, so the Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP) is 20% behind year-to-date relative to the S&P 500 and 34% over the past five years.
The question for investors is whether consumer staples stocks will remain off-limits in 2024. Indeed, the allure of consumer staples dividends is less attractive in a higher interest rate environment as we’re in today and likely for the next couple of years.
“After the best year versus the market since 2008 (in 2022), Staples is underperforming the market year to date and remains on track for the worst year vs. the market in at least 20 years (worse than 2003),” stated analyst Chris Carey in an Oct. 16 note to clients.
A headwind facing consumer staples stocks, albeit temporary, is the focus on weight-loss drugs and the perception that their success will translate into lower sales for companies like PepsiCo (NASDAQ:PEP).
Maybe. Maybe not.
That appears to be a transitory thing, and in a year or two, consumer staples stocks will be back riding high because people have to eat, and time-stretched consumers will take shortcuts with processed foods and the like.
With that in mind, here are three consumer staples stocks from XLP to buy in the fourth quarter and hold in 2024 and beyond.
Procter & Gamble (PG)
Procter & Gamble (NYSE:PG) is the largest holding in XLP with a 15.17% weighting. Its shares are down 2.3% in 2023.
As the Wells Fargo (NYSE:WFC) analyst stated in Barron’s reporting, Procter & Gamble’s fundamentals make it attractive. On Oct. 18, P&G reported Q1 2024 results that included earnings per share of $1.83, 11 cents better than the analyst estimate. At the same time, however, it adjusted its full-year revenue guidance to 3.0% at the midpoint. A big reason for the reduction is more related to the strength of the U.S. dollar and higher interest rates, rather than anything related to its core business.
While sales may not be accelerating rapidly, lower input costs should help deliver higher EPS growth. P&G’s CEO expects lower commodity prices in fiscal 2024 (June year-end) to generate $800 million in savings, which translates into 34 cents in additional profits based on 2.36 billion shares outstanding.
It expects to convert 90% of its net earnings in 2024 to free cash flow. Based on an EPS of $6.34 ($14.94 billion), it ought to generate $13.4 billion in free cash flow, more than enough to pay dividends and maintain its share repurchase program.
Of the 26 analysts covering PG stock, 15 rate it Overweight or an outright Buy, with an average target price of $165.51, 12% higher than where it’s currently trading.
A couple more strong quarters like Q1 2024 and analysts will be forced to raise their targets.
Costco (COST)
Costco (NASDAQ:COST) is the second-largest holding in XLP with a 10.65% weighting. Its shares are up 22% in 2023. Unlike XLP, COST stock is having a good year — again. Its shares are up 153% over the past five years, more than 6x XLP’s performance.
There’s no secret to Costco’s success. It drives hard bargains with suppliers, finds good deals on excess production runs, etc. It generates most of its profit from its membership fees. In fiscal 2023 (August year-end), its membership fees were $4.58 billion, less than 2% of its $242.3 billion sales for the year. However, almost entirely profit, its membership fees accounted for about 73% of its $6.29 billion net profit in 2023.
Customers keep coming because they never know what they will find at their local Costco. Sure, there are the Kirkland Signature (in-house brand) staples that are always there, but after that, it’s a crapshoot in a good way. It is one of America’s best-run retailers.
On this front, long-time CEO Craig Jelinek is stepping down from the role at the end of the year, Costco announced on Oct. 19. Jelinek has been CEO since 2012 when he replaced Costco co-founder Jim Sinegal. Jelinek’s job will be taken by current Chief Operating Officer Ron Vachris, who has worked at the company for 40 years.
Costco takes succession planning to the next level.
Mondelez International (MDLZ)
Mondelez International (NASDAQ:MDLZ) is the seventh-largest holding in XLP with a 4.37% weighting. Its shares are down 3.2% in 2023. Over the past five years, it returned more than double the index’s returns. With a 2.7% yield, it’s a very serviceable dividend stock.
Mondelez recently got hit by the Ozempic craze. Any products that might be threatened by the recent successes of Novo Nordisk’s (NYSE:NVO) hit drug have seen their share prices knocked lower.
The worst thing you can do as a business is to follow the crowd. There’s a difference between listening to your customers and guessing what they want. Unless customers tell the company to make zero-calorie cookies, I don’t see how someone’s desire to lose weight relates to Mondelez’s products.
As Walmart (NYSE:WMT) recently noted, you shouldn’t be in business due to the drug’s success if you’re worried about every little reason you might lose sales. That is the media making a mountain out of a molehill.
As for the company itself, it recently sold its developed market gum business — includes brands such as Trident, Dentyne, Chiclets, etc. — so it could focus on its core categories of chocolate, biscuits and baked snacks. It’s aiming to deliver 90% of its annual sales from these three areas.
Focus is always a good thing.
On the date of publication, Will Ashworth did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
