67% of the US economy is driven by consumer spending and through the economic cycles of the economy spending will still happen. How much and what is a need, what is a want and how they intertwine is the information provided by economists. As investors you want to know what companies have gone through multiple cycles and still make a profit. If they are making a profit, the stock will have a strong multiple and more importantly they pay their diviidend.
Ian Tam of Morningstar Research used his companies information bank to uncover some of the best companies to own if you are going to be defensive.
Mr. Tam started with 114 companies in the US consumer defensive sector and then began to narrow the field.
Dividend yiedl – needs one
Free cash flow FCF yield (operating cash flow in excess of capital expenditures over enerprise value, higher figure preferred)
Expected annual dividend growth rate (calculated from announced future dividends but not yet paid)
Return of Equity
Other qualifications: market capitalization greater than 1.3 billion
A dividend payout ration against earnings and cash flow of less than 80% and 60% respectively.
The top 10 on Mr. Tam’s list are:
Company Mkt Cap Div Yield FCF Expected div ROE Payout ratio Payout ratio
$ Bil % % Grth Rate % on EPS % on oper cf %
Molson Coors 12.263 4.0 6.1 39.0 7.5 50.9 18.1
Clorox 18.636 2.9 3.7 10.4 116.0 68.8 50.1
Walgreens Booth 49.234 3.4 7.0 4.0 21.7 30.5 25.2
Hershey 31.969 2.0 3.7 7.1 88.3 50.4 35.4
Keurig Dr Pepper 38.727 2.2 4.2 33.3 7.2 42.9 39.7
Kroger 19.487 2.6 3.0 14.3 21.1 27.4 10.0
Flowers Foods 4.632 3.5 4.4 4.1 15.9 73.8 43.1
NuSkin Enterprises 2.328 3.5 6.3 0.7 24.6 42.7 28.1
JM Smucker 12.240 3.3 4.7 3.5 10.7 42.3 36.5
Colgate-Palmollive 58.687 2.5 4.0 1.8 57.3 48.2
Linking to dividend paying stocks, if you look at the companies, consumers across the US and around the world will buy products for their homes. People may cut back or dilute but they will not make from scratch, we are the generation who buy stuff. It is important to have at least one defensive stock in your portfolio but the idea of investing is not to lose money in both good and bad times on the market. For the consumer stocks, the easiest thing to do is what companies do you buy from. Since you are not the exception, you can see if others are using the same products every time you shop.
There are more questions than answers, till the next time – to raising questions.