Consumer staples have been a defensive sector, especially during market downturns. Historically, they have outperformed the market during bear markets. Although consumer staples dividend stocks have underperformed year to date (YTD), they present a healthy risk-reward as we head into 2024.
So why have consumer staples underperformed, and why do they present opportunity? Rising yields have been one of the major headwinds. Since most investors own consumer staples dividend stocks for income, that thesis has come under pressure from rising yields. According to this JP Morgan report, bonds are now competitive with stocks.
Secondly, the emergence of GLP-1 drugs that help in weight loss has created a lot of apprehension. Notably, these drugs reduce appetite, meaning consumers eat less food and snacks. On the bright side, the selloff YTD has created some bargain opportunities in the packaged foods industry.
Quite possibly, the fear that GLPs will reduce demand is overblown. After all, less than 1% of the global population is on these drugs. Thus, consumer staples could rebound in 2024 as GLP-1 fears dissipate. Additionally, if the economy slows in 2024 consumer staples stocks with dividends could be the perfect defensive stocks.
Coca-Cola (KO)
Coca-Cola (NYSE:KO) has had a pullback from 2023 highs as yields surged in the third quarter. The selloff leaves it in bargain territory with a healthy 3.1% dividend yield. Although it has rebounded from the lows, the risk-reward is still attractive heading into 2024.
The soft drink giant has always been a defensive stock that is ideal for a volatile economic environment. Generally, when economic conditions decline, consumers cut discretionary spending but keep spending on food and drinks. Moreover, the company is well-positioned to deliver under various market conditions.
From a fundamental standpoint, the valuation is reasonable. While the S&P 500 trades at 18.7 x forward earnings, Coca-Cola trades at 21 times. That’s a slight premium for a high-quality business with one of the best returns on equity. Furthermore, shareholders earn a growing 3.1% dividend yield that the company has increased for 61 consecutive years.
Despite the weight-loss drug fears, Coca-Cola has shown impressive revenue growth. Notably, growth has accelerated throughout 2023. Net revenue growth was 5%, 6%, and 8% in Q1, Q2 and Q3, respectively. For the year, management expects 10% to 11% organic revenue growth.
Additionally, free cash flow has strengthened with revenue growth. YTD, it has generated $7.9 billion in free cash flow, an increase of $636 million compared to the prior year’s period. Remarkably, for a company of its size, it also increased its value share in total nonalcoholic ready-to-drink beverages.
Given Coca-Cola’s brand strength, the company can continue to gain value and volume share. This, plus the earnings stability, means it’s one of the best consumer staples dividend stocks. If there is a recession, it can provide stability to your portfolio.
Unilever PLC (UL)
Unilever PLC (NYSE:UL) has been a turnaround story for a while. Indeed, the company has lagged behind its primary competitor, Procter & Gamble (NYSE:PG). Due to poor operating performance relative to Procter, it trades at a meaningful discount. However, with an activist investor on the board, this gap can close in 2024.
Still, the company is a stalwart among consumer staples dividend stocks. Notably, over 80% of sales come from brands that are first or second place in their category. This strong market position highlights the strong brands the company owns.
To return to faster growth, management has initiated an action plan to improve performance. First, the company has decided to focus on its 30 major brands that account for over 70% of sales. With increased brand investment in power brands like Dove, the firm can accelerate growth.
Secondly, the company plans to improve gross margins and hence profitability. Management expects that premiumization efforts will enhance the product mix. Additionally, more productivity gains will materialize from operating efficiencies, network optimization, and competitive buying.
Under the new action plan, management expects 3-5% sales growth and margin expansion. If these plans succeed, UL stock is a bargain. It trades at 16 times 2023 earnings compared to Procter’s 20. That’s a significant gap that could close as management executes its action plan. Meanwhile, investors earn a 3.8% dividend as this turnaround takes shape.
Hershey (HSY)
Hershey (NYSE:HSY) has been one of the most consistent consumer staples dividend stocks. Over the past five years, it has compounded revenues at a 7.5% annual rate. Moreover, the growth rate has accelerated over the last 3 years to 11.5%.
The revenue acceleration has flowed directly to the bottom line, showing incredible operating leverage. Net income grew at a 16.92% CAGR over the last three years. Notably, this is the highest growth rate among large-cap packaged foods and meat stocks.
Based on the -18 % selloff, one would assume the fortunes of one of the best consumer staple stocks with dividends have changed dramatically. However, this is not the case, as management provided robust 2023 guidance in the third quarter report. They expect adjusted earnings per share growth of 11% -12 % and EPS of $9.46 – $9.54.
In terms of dividends, Hershey pays a healthy quarterly dividend. Additionally, it has been a consistent dividend grower, raising the dividend for 14 consecutive years. The trailing dividend yield is a healthy 2.4%.
As of this writing, Hershey trades at 19 times 2023 EPS. That’s a discount to its historical P/E ratio. Consumers love Hershey bars, Kit Kats, and Twizzlers and will always return for more.
On the date of publication, Charles Munyi 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.
