Investors are starting to worry that the market is quite extended — or to use the technical jargon, overbought. Not only that, sentiment readings from various indicators look rather extreme to the bullish side. On the surface, it seems to be a good time to think about taking a more defensive posture, likely with consumer staples stocks.
The reason is not complicated. The market does not like to be stretched out so thin. When “everyone” starts to have the same opinion, it usually does not end well.
Under such a scenario, it makes sense that defensive areas of the market would become more attractive. Moving some money out of aggressive sectors and into defensive sectors should help mitigate some of the risk should the market start to pull back.
Indeed, we do see some money leaving technology. The question is whether it will find a home in consumer staples. I contend that in the current market, it will not since interest rates are likely to move higher. This makes the generous dividend yield of this group of stocks both good and bad.
The good part is that big dividends offered by many consumer staples stocks can offset price declines if and when the market falls.
The bad part is that many consumer staples stocks now act similar to utilities, real estate and bonds thanks to the current low-interest-rate environment.
Income-seeking investors, including retirees, were not satisfied with the stingy yields in money-market funds and even long-term Treasury bonds. They set aside some of their risk aversion and moved their money into big-dividend-yield stocks, including consumer staples.
With the Federal Reserve re-committed to raising short-term interest rates despite non-existent inflation, fixed income investments, such as bonds, and assets that act like them, will have a rough time.
Dividend Consumer Staples: Altria Group (MO)
This past July, Altria Group Inc (NYSE:MO) was clobbered when the FDA announced its intent to lower nicotine levels in cigarettes to a non-addictive level. Shares of all tobacco stocks with U.S. suffered, too.
While it is tempting to buy a stock trading 16% below its 52-week high, the market still says it is broken. Apparently, even at the current reduced price it thinks the way forward sports too many obstacles. We can thank regulation and the changing industry landscape with e-cigarettes,
With a 4% dividend yield, the siren call of income is loud. Investors must resist because rising interest rates can wipe out that advantage, leaving a technically broken stock in its wake.
Dividend Consumer Staples: General Mills (GIS)
A nice 3.8% dividend yield offered by General Mills, Inc. (NYSE:GIS), the maker of Cheerios, and for you millennials, Cinnamon Toast Crunch. It also owns the Pillsbury Dough Boy and Betty Crocker. It is the ultimate defensive stock with products people will buy through good economic times and bad.
Yet the stock is down 16.3% year-to-date and its chart looks terrible. It last traded at its current levels in late 2014, so investors are not happy.
The issue for General Mills is changing consumer tastes. I joked earlier about millennials, but aside from the cultish cereal choice, the younger generation prefers to eat fresh and organic foods. The company built its house on prepackaged meals, canned foods and ready-to eat cereals.
It does not help that the overall trends in breakfast cereal, yogurt and canned vegetable consumption are all down.
There is no reason to gamble that this stock is suddenly cheap, especially when the value of its dividend may erode as interest rates rise. And we can probably say the same things for competitor Kellogg Company (NYSE:K).
Dividend Consumer Staples: Procter & Gamble (PG)
Procter & Gamble Co (NYSE:PG) is fresh off its “win” against activist investor Nelson Peltz, CEO of Trian Fund Management, who made yet another attempt to gain a seat on the company’s board of directors. The stock responded with a small loss Oct. 10 but it was down as much as 2.4% intraday on the news.
Apparently, the market thinks the company will not put any of its shareholder enhancement plans into place now that the activist was rebuffed.
Even without the extra-market news, the stock is no more than a mediocre value with a forward price/earnings ratio of 20.9.
While PG stock does have a rising trend since 2015, it ran into trouble at $92 in September. That is where it peaked in 2014. Investors seem unwilling to pay more for the stock, and the price is already in a short-term decline since that peak. Considering how close it is to its 52-week high, it is not a value technically OR fundamentally.
As of this writing, Neil Martin did not hold a position in any of the aforementioned securities.