The third quarter was the worst for stocks since 2011, and there are plenty of reasons to fear increased volatility through the rest of the year. From global conflicts and dwindling economic activity to the end of the Federal Reserve’s zero interest rate programs, the market has a right to be on edge.
That’s why right now, consumer staples should be on any short list of stocks to buy now.
Companies that produce food, as well as always-in-demand good such as soap and razor blades, aren’t exactly exciting, but they tend to be very predictable. After all, people will need to brush their teeth and was their hair, even in a recession.
These consumer staples’ non-cyclical nature not only helps tamp down on the volatility, but it also helps provide reliable cash flows, which trickle down as dividends. That’s a winning combination if you’re looking for stocks to buy to ride out market volatility.
According to Morningstar, consumer staples have had the second-lowest volatility of any market sector since 1962. That doesn’t always mean good returns every single year, but it does mean a lot less nausea when the market gets hectic.
If you’re looking for defense (and who isn’t?), here are six consumer staples stocks to buy now.
Consumer Staples Stocks to Buy Now: Kimberly-Clark Corp (KMB)
Kimberly-Clark (KMB), which operates in the boring business of toilet paper and paper towels, is a great pick in the consumer staples space.
KMB owns such powerhouse brands as Huggies and Pull-Ups diapers, Kleenex tissues, Scott and Cottonelle toilet paper and Depends protectors. Kimberly-Clark operates in 175 different countries, and according to the firm’s own metrics, 1 in 4 people worldwide use at least one of its products each day.
That kind of brand penetration definitely shows up on KMB’s top line. Organic sales — which kick out currency effects — for the last reported quarter showed an increase of 4%, powered by a 10% improvement in emerging and developing markets.
Kimberly-Clark’s problem has been its medical business, which produced items like sterile wraps, surgical facemasks and catheters and was a volatile contributor to earnings. However, KMB just spun off this business as Halyard Health (HYH), which should smooth out the company’s performance.
Meanwhile, you get to enjoy a 3.1% yield on a dividend that has been paid out for more than 80 years.
Consumer Staples Stocks to Buy Now: B&G Foods, Inc. (BGS)
Like Kimberly-Clark, consumer staples stock B&G Foods (BGS) operates in the world of boring. BGS sells food items such as pickles, taco shells and canned beans.
That has suited BGS shareholders just fine over the past few years, as they’ve enjoyed the benefits (namely: rising dividends) of healthy free cash flows.
But lately, BGS has been on more of a growth hunt.
B&G has added new organic/non-GMO snack food brands and made a major push into frozen foods. B&G recently offered to buy Green Giant (both frozen and canned products) from struggling General Mills (GIS) for $765 million in cash. That deal — the largest BGS has done — will help give the firm a foothold into frozen foods and be instantly accretive to earnings and FCF. In fact, management expects the deal to add about 60 cents per share to this year’s earnings.
Expect BGS to head north — and to keep adding to its 3.7%-yielding dividend.
Consumer Staples Stocks to Buy Now: Colgate-Palmolive Company (CL)
Consumer staples stock Colgate-Palmolive (CL) has a strong stable of brands (including its namesake toothpaste) across numerous product categories, helping it become household royalty in the developed world.
But Colgate’s growth potential comes from the emerging world.
CL has bet heavily on South America, Asia and Africa for its future growth. As such, more than half of its sales now come from emerging markets.
While some analysts have questioned that strategy — in part because of a slowdown in emerging markets — the logic is sound. Like here at home, people across the world still need to brush their teeth and use soap, even during recessions. And with middle-class incomes rising in many emerging markets, consumer staples are no longer luxury items.
CL grew operating cash 3% last year to more than $3.2 billion. Management in turn returned more cash to shareholders, upping the dividend by 5.5% this year to notch the 52nd consecutive year in which Colgate has hiked its payout.
Colgate currently yields 2.3%.
Consumer Staples Stocks to Buy Now: Hormel Foods Corp (HRL)
Meat stacked on meat stacked on profits — that’s Hormel Foods (HRL) for you.
The protein kingpin continues to navigate consumer trends effectively and has prospered where other prepackage food producers have floundered.
Part of that has come from reworking kitschy brands like Spam and expanding into new natural and organic meat lines. Its purchases of Applegate Farms and Wholly Guacamole are prime examples of how HRL is moving beyond canned stew and chili. Those moves have helped HRL more than double since the beginning of 2013.
That has come on impressive earnings growth of about 20% from 2012 to 2014. Recent results have been good as well, including record diluted EPS and volume sales in its third quarter.
Other larger food producers might take notice. InvestorPlace contributor Larry Ramer thinks HRL could be one of the next big consumer staples buyout targets in the near future.
In the meantime, HRL yields a modest 1.6% as you wait for growth or a buyout pop.
Consumer Staples Stocks to Buy Now: Clorox Co (CLX)
Sure, Clorox (CLX) sells a ton of its namesake bleach and other household cleansers, but the firm is a consumer staples powerhouse. 80% of its brands have No. 1 or No. 2 market share positions in their respective categories. These include such brands as natural lip balm producer Burt’s Bees, ranch salad dressing pioneer Hidden Valley and Glad trash bags.
This collection of top brands in its large stable has helped CLX grow its earnings for the past couple of years, and recent moves should help this consumer staples giant continue doing that.
Clorox’s recently updated “2020 Strategy” is designed to push the firm toward growing sales by 3% to 5% annually, expanding margins and generating free cash flow of 10% to 12% of sales. If Clorox is successful, it would justify its premium valuation of 27 times earnings.
CLX has one heck of a track record, delivering a total return of roughly 1,000% over the past 20 years — far better than the S&P 500’s 400% over that same time period.
Investors getting in today would enjoy a yield of around 2.6%.
Consumer Staples Stocks to Buy Now: Consumer Staples SPDR (XLP)
Perhaps the best way to play consumer staples as defense is to own them all. The Consumer Staples SPDR (XLP) exchange-traded fund still is one of the easiest ways to add a dose of consumer staples in one trade.
The XLP tracks all 37 consumer staples stocks in the S&P 500, including every aforementioned pick but BGS.
XLP has delivered 10.7% annual total returns on average over the past decade vs. about 7.5% for the S&P 500. Part of that performance comes from a 2.6% dividend yield.
Expenses are cheap, too, running at 0.15%, or $15 annually per $10,000 invested. So if you’re really torn about which consumer staples are stocks to buy now, don’t sweat it — just buy a bundle.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.