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3 Highly Profitable Consumer Staple Names to Buy for Income

The consumer staples industry is relatively recession proof, allowing for companies to be very profitable

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Nathan Parsh
Sep 16, 2021

Summary

  • Altria is a leading tobacco company that scores well against peers in a number of areas.
  • In the massive consumer packaged goods space, few can touch Hershey's ranking.
  • PepsiCo outperforms peers on a number of metrics.
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The consumer staples sector is very popular among dividend growth investors because these companies often have fairly recession proof business models. Due to this, consumer staples are often profitable through all stages of the economic cycle, allowing them to return capital to shareholders in the form of dividends. Even better, these stocks often come with market-beating yields and long histories of dividend growth. In this article, we will examine three highly profitable names in the consumer staples sector that can provide investors with attractive dividends.

Altria

Altria Group (

MO, Financial) distributes the leading tobacco brand Marlboro in the United States. In addition, the company’s portfolio includes non-smokeable brands, such as Skoal and Copenhagen, as well as the Ste. Michelle brand of wine. Altria has an ownership stake in Anheuser Busch InBev (BUD, Financial) and vaping products manufacturer and distributor Juul, among other investments. The company is valued at $93 billion and generated revenue of $21 billion over the last four quarters.

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Altria has a GuruFocus profitability rank of 8 out 10. The company’s best category is its operating margin, which comes in ahead 95% of the 40 other companies in the tobacco industry. The operating margin of 54.7% is also the company’s best showing over the last decade. Altria’s return on equity is also one of the best among its peers, topping 94% of those in its industry.

Altria does have a very high rate of return on equity, though this is below the median score for the last 10-year period of time. Return on capital ranks well compared to the competition, but is a middling performance as far as the company’s long-term history is concerned.

Altria does have lackluster numbers for its three-year Ebitda growth rate and three-year earnings per share (EPS) without non-recurring items (NRI) growth rate, as the results for these metrics are at the low end of the industry as well as the company’s own history.

Following a 4.7% increase for the upcoming Oct. 12 payment date, Altria has raised its dividend for 51 consecutive years. This is one of the longest dividend growth streaks in the market. For context, there are just 30 or so companies that have the minimum of five decades of dividend growth needed to gain membership into the Dividend Kings index. The dividend has a compound annual growth rate (CAGR) of 8% since 2011.

Shares of the company yield 7.3% presently, which is considerably higher than the 10-year average yield of 5.3%. Were this the average yield for 2021, it would be the second highest figure in more than a decade. Altria has an annualized dividend of $3.60.

Altria trades at $49 at the moment, giving the stock a forward price-earnings ratio of 10.6 using analysts' estimates of future earnigns. The stock has an average price-earnings ratio of 16.4 over the last decade.

Altria is a favorite amongst dividend growth investors due to its high yield and long track record of dividend growth. The company has returned significant amounts of capital to shareholders over the years. Altria can do this because it is a highly profitable company that has limited capital expenditures and no advertising budget. The current high yield does look safe at the moment, but possible Food & Drug Administration bans on e-cigarettes could be an issue. However, you don’t attain Dividend King status without overcoming major hurdles in business. Given the company’s profitability, the stock’s low valuation, high yield and dividend growth track record, Altria could be a name with immense total return potential.

Hershey

The Hershey Company (

HSY, Financial) is the largest producer of chocolate and nonchocolate confectionery products in the U.S. The company has an incredible number of well-known brands such as Hershey’s, Kisses, Reese’s, Kit Kat and Cadbury. Hershey is valued at $36 billion and produced revenue of $8.7 billion over the last year.

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Hershey also receives an 8 out of 10 profitability rating from GuruFocus. The company scores wells and compares comfortably to its peer group and its own history on a number of different metrics. The company’s operating margin of nearly 24% tops more than 94% of the 1,729 names in the consumer packaged goods industry. This is also the highest score in the last decade for the company. The net margin beats 90% of peers and is also at the high end of Hershey’s long-term range.

Return on equity and return on assets results are amongst the best in the industry, though they are more in the middle of the company’s 10-year range. Return on capital is also extremely high, besting 92% of the industry group.

The three-year revenue growth rate is Hershey’s weakest score, but still comes out on top of more than half of peers. This growth rate is below the company's median growth since 2011, however.

Hershey raised its dividend 12.1% for the Sept. 15 payment date, one of the larger increases in the company’s recent history. The company grew its dividend with a CAGR of 8.6% from 2011 to 2020. Hershey has sustained a dividend growth streak of 12 years.

The stock has a yield of 2.1% today, which isn’t too far off of the 10-year average yield of 2.3% and is almost a full percentage point above the S&P 500 index.

Hershey has an annualized dividend of $3.60. With the expectation for earnings per share of $6.90 for the year, this implies a payout ratio of 52%. Hershey has prudently managed its dividend over the last decade, with a payout ratio in a range of 48% to 54% since 2011. This year’s projected payout ratio fits within this range.

Investors can purchase shares of Hershey at $175 per share right now. Using analysts’ estimates for the year, shares have a forward price-earnings ratio of 25.4. Hershey has often traded with a high multiple, as the average price-earnings ratio since 2011 is 22.3.

Hershey has a massive leadership position in its industry that has allowed it to become one of the more profitable companies in the consumer packaged goods space. The company outperforms nearly all of the members of its sizeable peer group in many areas. Just as important, Hershey’s scores are largely near the high end of its own historical range. Shareholders have enjoyed a high single-digit dividend growth rate over the last 10 years and the payout ratio during this period shows just how consistent Hershey’s business is. The valuation is a little rich relative to its historical average, but not terribly so. Conservative investors looking for steady income and a high growth rate could find Hershey’s stock appealing.

PepsiCo

PepsiCo, Inc. (

PEP, Financial) is a leading snack and beverage company that has 23 brands with more than $1 billion in annual revenues. The company’s best-selling brands include Pepsi, Gatorade, Frito-Lay, Mountain Dew and Tropicana orange juice. PepsiCo’s revenue totaled almost $75 billion over the last four quarters and the stock has a market capitalization of $215 billion.

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For its industry group, PepsiCo outperforms peers in a number of categories, even if recent performance doesn’t outshine the company’s own history.

PepsiCo’s operating margin of 15.1% is better than three-quarters of the 97 companies in the non-alcoholic beverage industry while the net margin tops 73% of the competition. Both results are just above PepsiCo’s median score for the last 10 years.

Return on equity compares favorably to peers, beating 99% of the industry group. This score is also in the upper quartile of the company’s long-term range. Return on capital also ranks high, but is, again, in the middle of PepsiCo’s decade-long range.

The three-year revenue growth and the three-year EPS without NRI growth rate are higher than 71% and 67% of PepsiCo's peer group, respectively, even if both are middling numbers compared to PepsiCo’s long-term performance. The three-year Ebitda growth rate is the company’s weakest area, coming in lower than more than half of peers and sitting near the very low end of the 10-year range.

PepsiCo recently raised its dividend 5.1%, extending the company’s dividend growth streak to 49 years. The company is one year away from Dividend King membership. The dividend grew 6.8% annually from 2011 through 2020. Shares yield 2.8% today, nearly matching the 10-year average yield of 2.9%.

PepsiCo’s annualized dividend totals $4.30. Analysts expect the company to earn $6.23 this year, giving the stock a forward price-earnings ratio of 69%. PepsiCo has averaged a payout ratio of 60% since 2011.

Shares of the company trade hands at $156, giving PepsiCo a forward price-earnings ratio of 25. This compares to the average price-earnings ratio of 20.4 over the last decade.

PepsiCo is a giant in its industry, with very few true competitors as the company has a dominant market share in both the snack and beverage markets. As a result, the company’s profitability metrics are well ahead of its peers in a number of areas. Currently, the scores for most of those metrics for the company are near the median for their respective results for the last 10-year period. Still, PepsiCo has been a well-run company for a long time and has an incredible dividend growth track record. Investors looking for a stable, profitable and solid yielding name should consider owning shares of the company, in my opinion.

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I am/we are Long PEP
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