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All Contents © 2020The Kiplinger Washington Editors
By Will Ashworth, Contributing Writer
| December 31, 2019
Uncertainty heading into a presidential election cycle, a continued trade war with China (it's only a "Phase One" agreement, after all) and potentially sluggish U.S. economic growth has many Wall Street analysts recommending investors rotate into defensive stocks. And unsurprisingly, consumer staples stocks are getting the nod heading into 2020.
It makes sense. Consumer staples stocks – which provide things that people need on a near-daily basis, from food to toiletries – make excellent investments in virtually every economic environment, but they're especially attractive during economic slowdowns. That's because people simply can't cut back on consumer staples like they can other products. As a result, the sector has historically outperformed the broader market during downturns.
"We expect the market to vacillate between a pro-cyclical outcome and a defensive one as data comes in and trade tensions and the election evolve," Mike Wilson, Morgan Stanley's chief U.S. equity strategist, wrote in a note to clients in early December. "We slightly favor the more defensive outcome given our well below the consensus forecast for S&P 500 earnings growth next year."
Admittedly, if we get another bull run like we did in 2019, consumer staples might lag a bit. While their 2019 total return (price plus dividends) through Dec. 30 of 27.3% is far better than their 12-year average annual return of 10.4%, it still was about three percentage points behind the S&P 500. However, if the market gets choppy, and especially if a correction or bear move is in the cards, expect this sector to shine.
Against that backdrop, here are the best consumer staples stocks to buy for 2020. These picks, which include a pair of funds, offer an ideal combination of growth, downside protection and yield that should come in handy if turbulence kicks up in 2020.
Data is as of Dec. 30. Stocks listed alphabetically. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Market value: $25.7 billion
Dividend yield: 3.0%
Archer Daniels Midland (ADM, $46.12) is a global food processing and commodity trading giant that is responsible for hundreds of products, including grains, flours, edible oils, proteins and more. And it was plenty happy to see the revised USMCA trade agreement between the U.S., Mexico and Canada signed by all three countries' trade representatives on Dec. 10.
ADM believes that the trade agreement, which is expected to be signed into law in 2020, will benefit the agriculture and food industries of all three countries. Furthermore, ADM, which faced major external headwinds in 2019 – including lower margins and volumes sector-wide – expects the trade agreement should help stabilize the North American agricultural industry.
Since 2014, Archer Daniels Midland has been restructuring its organization to operate efficiently while selectively targeting new areas for growth. Strategic acquisitions have been at the heart of this growth, with the company spending more than $7 billion globally on mergers and acquisitions (M&A) over the past five years.
Heading into 2020, however, ADM plans to put its aggressive acquisition strategy on hold, and instead focus on organic growth and operating efficiencies.
"With this level of acquisitions we have had, I don't think you will see ADM being a very aggressive M&A investor over the next few years," Ismael Roig, Archer Daniels Midland's Europe, Middle East and Africa president, told the Global Grain Geneva conference in November.
Among the reasons to like ADM as a top consumer staples stock in 2020? Analysts expect a rebound in earnings, from an estimated $2.56 per share for 2019 to $3.28 in 2020. The stock trades at 14 times analysts' expectations for next year's profits, which is much cheaper than the S&P 500's forward price-to-earnings (P/E) ratio of nearly 20. And ADM shares offer up a healthy dividend yield of 3% at current prices.
Market value: $32.3 billion
Dividend yield: 1.0%
Brown-Forman (BF.B, $67.58) could have taken one on the chin in 2019 given tariff issues with the European Union and China. But instead, the maker of Jack Daniel's, Herradura tequila and Korbel wine found a way to grow profits despite absorbing most of the tariff costs rather than passing them on to loyal customers.
This alone should pay dividends for years to come.
"We continue to build our business for the long-term. Our takeaway trends remain healthy in many major markets as we continue to invest in consumer momentum by absorbing most tariff-related costs," CEO Lawson Whiting stated in the company's fiscal Q2 2020 press release in early December. "We believe this, coupled with increased investments in advertising and route-to-consumer changes in certain markets, position us well for the next generation of growth."
In its current fiscal year, which ends April 30, 2020, Brown-Forman expects revenues to grow between 5% and 7% year-over-year, its operating profits to improve by 2% to 4%, and earnings-per-share growth of roughly 4%, based on the midpoint of its estimated range. Areas of strength for the Kentucky liquor manufacturer include its Woodford Reserve premium bourbon and Herradura brands. That likely will be offset by weakness in emerging markets and travel retail markets.
Like several of the best consumer staples stocks to buy for 2020, Brown-Forman is a Dividend Aristocrat – the elite group of S&P 500 companies that have improved their dividends every year for at least a quarter-century. BF.B hiked its payout by 5%, to 17.43 cents per share, in November, to extend its streak to 36 years.
Market value: $236.8 billion
Dividend yield: 2.9%
Coca-Cola (KO, $55.27) is entering 2020 on the attack.
In January, Coca-Cola will launch its first Coke-branded energy-drink line in the U.S. It's a play on the explosive energy-drink market – one that will see the company use its namesake brand on a non-soda product for the first time.
Then in March, Coke will launch its first totally new flavored sparkling-water line, AHA, across the U.S. Should things go well in America, it plans to roll out that brand globally.
"As the largest and fastest-growing part of the water business, mainstream flavored sparkling water is a segment we know we must double-down on," Celina Li, vice president of water for Coca-Cola North America, said in November. "AHA is our big-bet brand in this big-bet category."
Coke CEO James Quincey's biggest regret as chief executive is that he hasn't moved quickly enough into certain segments of the beverage market, and that includes sparkling water. Nonetheless, Coca-Cola is better positioned for growth than it has been in some time. Analysts are projecting a 7% pop in profits for 2020, versus a sub-1% improvement projected for full-year 2019.
Conversely, with some experts calling for a potential recession in 2020 or 2021, Coca-Cola's defensive nature is becoming more attractive to investors, too. KO's 2.6% dividend hike in February 2019 marked the company's 57th consecutive annual payout increase.
Morgan Stanley analysts believe Coke's pricing power, combined with a newfound thirst for innovation and a growing emerging markets' business makes the company the best large-cap stock in the U.S. beverage industry.
Market value: $36.1 billion
Dividend yield: 1.6%
Constellation Brands (STZ, $188.37) is a triple threat in the alcoholic beverage industry, boasting a strong portfolio of beer (Corona), wine (Robert Mondavi, Kim Crawford), and spirits (Casa Noble tequila, Svedka vodka, High West whiskey).
That said, most investors have their eyes squarely on the company's $4 billion, 38% ownership stake in Canopy Growth (CGC), Canada's largest cannabis company.
While Constellation Brands isn't satisfied with its cannabis investment to date – it fired co-founder and co-CEO Bruce Linton in July 2019 – STZ says it's sticking by the cannabis company, which has partnerships with the likes of Snoop Dogg and Drake. Constellation Brands CFO David Klein, who already serves as Canopy's chairman of the board, will take the reins as the company's chief executive in early January.
Tim Seymour, portfolio manager of the Amplify Seymour Cannabis ETF (CNBS), says "David Klein's move from CFO of STZ to CEO of Canopy Growth should yield greater financial discipline from their Canopy Growth investment."
Seymour also believes Constellation Brands is a top consumer staples company to watch in 2020.
"The company is clearly streamlining its business to achieve higher performance from core assets to deliver strong and consistent earnings growth," he says. "Their Mexican import portfolio is highly profitable, and they are selling non-core beer/wine assets (Gallo) to become a more efficient company. And the company should continue to take market share from (Anheuser-Busch InBev and Molson Coors)."
Market value: $130.4 billion
Dividend yield: 0.9%
Costco (COST, $295.14) didn't start 2019's long Thanksgiving weekend off quite as planned. It suffered a website crash that lasted most of Thanksgiving Day, infuriated its online customers and is estimated to have cost the warehouse retailer almost $11 million in sales.
Costco isn't the first major retailer to suffer a key online outage, and the company made things right by extending its Thanksgiving Day-only promotions to Black Friday. Nonetheless, that sales shortfall also contributed to a revenue miss for fiscal Q1 2020, which the company reported in December.
The good news? Earnings of $1.73 per share beat analyst expectations, adjusted same-store sales (revenues from stores open at least 12 months) improved by 5% year-over-year, and e-commerce sales rose by 5.7%.
Baird analysts appear to think Costco is among the top consumer staples stocks for 2020, calling it a "best-in-class" retail play. "COST's strong fundamentals (including best-in-class traffic/comps) and durable competitive advantages continue to stand out within retail," they wrote in late November. "With expanding structural cost advantages (which can help widen the company's superior value proposition), a loyal membership base, and growing omni-channel capabilities, COST remains a rare growth staple with still-meaningful growth opportunities."
Another reason to watch out for Costco: It opened its first store in Shanghai, China, in August 2019. While it won't open its second store there until early 2021, Chinese consumers are flocking to the American sensation. During the fiscal Q4 2019 conference call in early November, CFO Richard Galanti said the store already has 200,000 members. That compares to 65,000 members for the average location.
Expect more good news from the retailer's Chinese expansion in 2020 to drive a little extra interest in COST shares.
Market value: $576.1 million
Dividend yield: 2.5%
Expenses: 0.084%, or $8.40 annually on a $10,000 investment
If you prefer to attack the consumer staples sector via a diversified fund, rather than an individual stock or two, the Fidelity MSCI Consumer Staples Index ETF (FSTA, $37.65) is one of the best exchange-traded funds (ETFs) for the job.
First and foremost, Fidelity's fund is dirt-cheap, charging a mere 8.4 cents for every $100 you invest. It also gets you broadly invested across a wide swath of 92 consumer staples stocks – large-, mid- and small-cap alike. The portfolio spans from $310 billion consumer multinational Procter & Gamble (PG) to $235 million Village Super Market (VLGEA), which owns roughly 30 ShopRite stores across four states, with most in New Jersey.
This is a concentrated portfolio, however, with more than two-thirds of its assets wrapped up in the top 10 holdings, including a nearly 15% weight in P&G and another 11% in Coca-Cola. And while the index does capture stocks of all sizes, large caps account for 88% of the portfolio.
Still, FSTA is an inexpensive way to spread your risk across a bundle of consumer staples plays while leaning heavily on the sector's blue chips to get you there. Its 2.5% dividend yield is also more than you'll get from the S&P 500 (1.8%) right now.
Learn more about FTSA at the Fidelity provider site.
Market value: $509.7 million
Dividend yield: 2.3%
While the Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS, $145.53) isn't as cheap as Fidelity's fund, it makes up for that with above-average performance and an alternative way to get your consumer-staples exposure.
RHS tracks the performance of the S&P 500 Equal Weight Consumer Staples Index, a collection of 33 consumer staples stocks within the S&P 500 index. The fund, which rebalances quarterly, begins each three-month period by giving each of those 33 stocks the exact same weighting. That's different than the S&P 500 Index, as well as many sector funds (including FTSA), which distribute weights based on the company's market value.
Invesco's equal-weight ETF is like FTSA in that it's heavy in large-cap stocks, at 76% of the portfolio. But because of the equal-weighted nature of the ETF, RHS's top 10 holdings account for only about a third of the fund's assets. It's heaviest in the food products industry, at 40% of the portfolio, followed by beverages (18%) and food & staples retailing (15%).
Most importantly, RHS's performance is top-notch. It has beaten the category average in every major time frame since inception in December 2006, and it's the best-performing "consumer defensive" ETF over the trailing 10-year period, delivering 13.6% in annual total returns.
Learn more about RHS at the Invesco provider site.
Market value: $30.7 billion
Dividend yield: 2.1%
Hershey (HSY, $146.82) was one of the best consumer staples stocks of 2019, delivering 40% in total returns through the year's penultimate day – the stock's best performance in more than a decade. Those returns, made under CEO Michele Buck, are just one example of how executive-level gender diversity is paying off in corporate America.
In fact, Hershey's board is so happy with Buck's performance that it appointed her to the additional role of chairman in October. She will replace Chuck Davis, who will return to his role as the lead independent director. Buck is one of only 26 female CEOs within the S&P 500. She's an even rarer breed now that she's serving the dual roles of CEO and chairman.
At the end of October, Hershey said it expects its 2019 adjusted earnings to come in between $5.68 and $5.74 per share, or roughly 6% to 7% growth from 2018. Analysts expect at least 8% earnings growth in 2020, modeling earnings of $6.16 per share. That should come on 2.8% revenue growth – a little better than 2019 projections.
Bank of America analyst Bryan Spillane believes that the investments Hershey is making in its business will translate into further growth for the company in 2020. Hershey instituted a price increase in July 2019 that should start to show up in the company's Q1 2020 results.
Spillane has a $165 price target on HSY stock, which represents about 12% upside from current prices – better than most analyst estimates for the broader market in 2020. While his target assumes a much higher price multiple than many of its competitors, Spillane believes Hershey's investments justify a premium valuation.
Market value: $24.1 billion
Hormel Foods (HRL, $45.00) – the food company behind brands such as Spam, Jennie-O turkey, Natural Choice deli meat and Skippy peanut butter – expects 2020 to be a good year for both its top and bottom lines.
"In 2020, we expect to grow operating income as we did in 2019 while also growing sales," Hormel CEO Jim Snee said in late November. "I am confident we have the right strategy, business model and leadership team to continue delivering long-term sustainable growth."
Hormel's outlook for 2020 includes revenues of between $9.5 billion and $10.3 billion, pre-tax earnings growth of 5% to 7%, and earnings per share between $1.69 and $1.83 a share.
If you're a dividend investor, you'll like Hormel's status as longtime Dividend Aristocrat. The company upped its payout by 11% on Nov. 26, marking its 54th consecutive year of payout hikes – and the 11th consecutive year of double-digit dividend increases. HRL now pays 23.25 cents per share quarterly.
BMO analyst Kenneth Zaslow believes the company's strong brands, solid balance sheet, growth opportunities, and technological innovation sets it up for above-average long-term growth.
Hormel also is worth a look if you're hunting the best consumer staples stocks to buy with an eye past 2020. An up-and-coming driver for HRL is Columbus Craft Meats, which Hormel acquired for $850 million in October 2017. Hormel has broken ground on a state-of-the-art dry sausage production facility that should be ready in early fiscal 2021. The plant will give California-based Columbus added capacity for its charcuterie products and distribution on the East Coast.
Market value: $103.3 billion
Dividend yield: 1.9%
Starbucks (SBUX, $87.44) is technically a consumer discretionary stock, but it's one that its customers are increasingly treating as a daily staple. And its CEO, Kevin Johnson, could be in for a very big payday if the world's largest coffee chain delivers the goods over the next three years.
On Dec. 9, Starbucks' board announced it granted Johnson a special award that could amount to $50 million. To collect on this substantial sum, the performance of SBUX stock between Oct. 1, 2019, and Sept. 30, 2022, must exceed 80% of the companies in the S&P 500. COO Rosalind Brewer – a likely candidate to succeed Johnson were he to step down at some point – is in line to earn as much as $10 million.
There's nothing like motivated management to spur shares higher.
Given strong fiscal fourth-quarter performance, Starbucks ought to be able to get out to a strong start in fiscal 2020. U.S. same-store sales grew 6% while China's same-store sales and total transactions increased by 5% and 13%, respectively. Global Q4 2019 same-store sales growth of 5% was the company's second-highest growth rate from the past 10 quarters.
China will continue to be a growing part of the Starbucks equation. In fiscal 2019, the company opened more than 600 net new stores in China, bringing its total there to more than 4,000. That puts SBUX in good shape to take on Luckin Coffee (LK), the upstart coffee shop chain that has taken China by storm.
As for fiscal 2020, Starbucks expects to open as many as 2,000 stores globally, grow revenues by 6% to 8% and improve global same-store sales by 3% to 4%. That should filter down to adjusted earnings growth of roughly 6% to 8% … though analysts think SBUX is being conservative, projecting a roughly 12% pop in profits for fiscal 2020. Clearly, Starbucks isn't as defensive as other true consumer staples, but it holds some protective properties while offering excellent upside potential.
"Overall, we sensed a high degree of confidence that the 'growth at scale' agenda is working in the near and medium term, meeting if not exceeding set sales and margin objectives," JPMorgan analyst John Ivankoe wrote in December after meeting with management.