Talk of the brutal drought in the Midwest is hard to escape these days and, unfortunately, so are the drought’s effects. Corn — one of the hardest-hit crops of all — is directly or indirectly in three-quarters of food consumers buy.
Still, let’s not overemphasize how much commodity costs will weigh on the shoulders of consumers and companies alike. For consumers, commodities like wheat and corn only make up 14% of the cost of food, and the Consumer Price Index remained flat in July despite the drought, with food prices only rising 0.1%.
Not to mention, when it comes to providing or producing the food, not all food companies are created equal. For example, protein and meat producers like Tyson Foods (NYSE:TSN) and Smithfield Foods (NYSE:SFD) have been hit hard by the higher costs of feeding their livestock. But companies like Nestle (PINK:NSRGY) that deal in products that use coffee, cocoa and sugar haven’t been nearly as burdened.
So if you’re wary of all food companies, stop. Many of them will be able to weather the drought just fine, and as a whole, food stocks often are among some of the better defensive plays — after all, everyone still has to eat. But one of the best arguments of all: Many food companies offer reliable, attractive dividends.
Here are three stocks in particular that not only are positioned to weather the lack of storms, but also offer a decent payout:
Confectioner Hershey (NYSE:HSY) — a Ten Best Stocks for 2012 pick — doesn’t exactly deal with corn and soybeans. No, this company stays on the sweet side of things and, lucky for Hershey, the price of being sweet hasn’t skyrocketed of late. In fact, sugar — a key ingredient to many of Hershey’s irresistible treats — fell to eight-week lows recently, and cocoa has declined, too.
But, when its input costs do go up, Hershey controls a huge portion of the candy market, and thus has the power to pass the cost along to consumers without worrying about losing many customers in the process.
Hershey is about as solid as dividend-payers come, having written checks to investors since 1930. The company also has increased its dividend roughly 25% over the past four years, good for a current yield of 2.1%. While that’s not extravagant, you can give some of the thanks for the modest yield on market-beating 17% returns this year.
H.J. Heinz Co.
Another stock that looks strong amid the dry spell is ketchup-maker H.J. Heinz Co. (NYSE:HNZ).
The company’s main product, of course, uses mostly tomatoes — good news, considering tomato crops have been booming while others wilt away. However, another important ingredient to Heinz is potatoes (Ore-Ida is one of its brands), which have seen small but salvageable yields of late. But, compared to corn and soybeans, that’s still a good place to be.
Heinz does face two issues, though. One is the price of high-fructose corn syrup. HFCS is used in many of its condiments (and obviously comes from corn). But the company has switched to sugar in some of its product lines (like “Simply Heinz”) and also has an advantage in the fact that condiments tend to be a staple of meals.
The company also faces the threat of generics. As the economy continues to crawl along, many consumers are eschewing name-brand foods for cheaper store brands.
However, a diverse line of offerings, deals with companies like T.G.I. Friday’s and Weight Watchers (NYSE:WTW), and sales growth from new markets also help to offset those concerns. Not to mention, Heinz and Ore-Ida are two of the most dominant brands in food.
Heinz has paid a dividend for more than a century, and has been boosting its payout since scaling it back in 2003. It currently pays 51 cents per share quarterly, which translates to a hefty 3.7% yield — helping to make up for a lackluster 3% gain year-to-date.
To round out the trifecta, we have Kraft Foods (NASDAQ:KFT) — another company with variety. Kraft offers beverages, cheese and dairy products, snack foods, confectionery items and convenience foods. That versatility gives it a leg up over companies like Kellogg (NYSE:K) and General Mills (NYSE:GIS), who offer some diversity but rely heavily on their cereal businesses.
Supporters of Kellogg and General Mills will tell you that the cost of a box of corn flakes, for example, actually isn’t affected that much by rising corn prices. But all cereal — corn flakes or not — use some kind of grain, and that can add up when it’s your main product. Kraft isn’t immune to the cost of grain and corn, but the impact isn’t as severe.
Kraft has been increasing its dividend since it went public in 2001 — from 13 cents quarterly then to 29 cents now, which translates into a 2.8% year. KFT shares have steadily risen this summer amid a barrage of drought-related headlines, and currently are up 8% on the year.
But be aware: Kraft will be splitting into two separate companies — its legacy North American grocery business on one side, with an international snack food business to be named Mondel?z International on the other — on Oct. 1.
As of this writing, Alyssa Oursler did not hold a position in any of the aforementioned securities.