My wife grew up in a largish Catholic family. It’s no surprise that most of her childhood was spent in the back of their Oldsmobile station wagon shuttling to different local grocery stores (this was pre-wholesale club) to take advantage of various sale items advertised in newspaper ads and circulars. For consumer staples, price always matters. The same holds true when buying the stocks of packaged goods companies like General Mills, Inc. (NYSE:GIS) and B&G Foods (NYSE:BGS).
At the bottom of the 2008 financial crisis, shell-shocked investors tiptoed back into equities via consumer staples stocks. The defensive nature of this sector and its dependable dividend streams made sense in uncertain times. But, like with all investor trends, the sector became crowded and expensive. Until now.
From its mid-year high, the Consumer Staples Select Sector SPDR ETF (NYSE:XLP), dropped nearly 10% before beginning a recovery in December. While the exchange-traded-fund basket approach is not a bad idea, especially with a discounted price and an attractive 3% dividend yield, there are better bargains available in individual names.
Two Consumer Staples Stocks to Keep an Eye On
Consumer staple titan General Mills has pulled back nearly 15% from its recent high, pushing the dividend yield to near 3%; a 20% pickup in yield over the ETF strategy. With one of the most well-known product portfolios in the sector, that includes brands such as Cheerios, Pillsbury, Betty Crocker and Old El Paso, GIS had an impressive 2016.
Year-over-year revenue as of August 2016, totals $16 billion, cash flow from operations is nearly $1 billion year-to-date and General Mills has produced half a billion dollars in free cash flow.
But while these numbers are strong as new rope, investors were disappointed with the GIS’ most recent earnings report. Earnings-per-share came in at 80 cents, an 8% decline from the same period last year. General Mills also predicted a 3% to 4% decline in organic sales.
The news wasn’t all bad, though. Management raised the quarterly dividend 9% from 44 cents to 48 cents per share. Despite the softer sales outlook, GIS can still use the power of its monster brands to generate equally monster cash. The recent pull back looks like a good opportunity for investors looking for a high quality, consumer staple name.