The S&P 500 consumer staples index has continued to soar. Since a peak in economic growth and the potential for higher market volatility puts downward pressure on cyclical sectors, consumer staples' earnings profile and defensive approach could give your portfolio a lift.
Why else should you invest in consumer staples? Besides the ho-hum ongoing discussion about the fact that consumer staples are important for portfolio diversification, stocks in this sector tend to offer steady growth, solid dividends and low volatility, particularly in the face of high inflation, which we're experiencing right now. Some sectors generally perform better than others if inflation rises — ahem, enter consumer staples.
Even if they're less fireworks-like than more exciting investments (more like sparklers that sputter and die out) you can think of consumer staples as a lifeboat in a storm. Let's work through the reasons you may want to consider consumer staples, and identify three solid options that might make sense for your portfolio.
What Are Consumer Staples?
What are consumer staples, anyway? Consumer staples consist of companies that provide goods and services that people use on a daily basis, like food, clothing and other daily-use personal products.
Consumer staples stocks are also generally defensive, dividend-paying stocks, so if you're seeking security, you may be happy with the dividend yields offered by consumer staples.
Procter & Gamble Co. (NYSE: PG), headquartered in Cincinnati, Ohio, delivers branded consumer packaged goods in the following categories: beauty, grooming, health care, fabric and home care and baby, feminine and family care. You probably already consciously know about its products — razors, shave products, toothbrushes, rapid diagnostics, vitamins, fabric enhancers, laundry detergents, baby wipes, feminine products, paper towels and toilet paper. Procter & Gamble makes such a wide variety of products that it's no wonder it showed tremendous growth in 2021. It's hard to turn a blind eye to the historical growth of this gargantuan company.
Procter & Gamble showed $76.1 billion in net sales compared to $71 billion in net sales in 2020. Procter & Gamble's annual report also reported the following:
- Organic sales grew more than 6%.
- Core earnings grew 11%.
- Adjusted free cash flow productivity was 107%.
Organic sales grew 6% over the past six quarters and showed core earnings per share growth of 9% on average. In fiscal year 2021, growth within its 10 product categories included home care, oral care, skin and personal care, grooming, fabric care, feminine care, hair care and personal health care all grew in either the mid-single digits or grew double digits.
Looking for dividend stocks? Procter & Gamble has paid a growing dividend and announced a 10% increase in our dividend — the 65th consecutive annual dividend increase and the 131st consecutive year in which Procter & Gamble has paid a dividend. For example, Procter & Gamble paid $1.97 per share in fiscal 2011 and grew to $3.24 in fiscal year 2021.
Bunge Ltd. (NYSE: BG), headquartered in Chesterfield, Missouri, has 23,000 dedicated employees working across approximately 300 facilities in more than 40 countries. The company operates as a holding company for the supply and transportation of agricultural commodities and in the following segments:
- Agribusiness: Its agribusiness segment involves the purchase, storage, transportation, processing and sale of agricultural and commodity products.
- Edible oil products: Its edible oil products concern the production and sale of vegetable oils, shortenings, margarines and mayonnaise.
- Milling products: Bunge's milling products segment produces and distributes wheat flours, bakery mixes and corn- and rice-based products.
- Sugar and bioenergy: This segment includes the manufacture and marketing of sugar and ethanol derived from sugarcane, as well as energy derived from the sugar and ethanol production process.
- Fertilizer: The fertilizer segment hones in on producing and distributing fertilizer products for the agricultural industry.
Bunge shored up a Q3 GAAP EPS of $4.28 vs. $1.84 in the prior year and excellent performance across both core and non-core operations, including strong agribusiness and refined and specialty oils results. The company improved its full-year adjusted EPS outlook to at least $11.50 based on strong Q3 results.
Archer-Daniels-Midland Co. (NYSE: ADM), headquartered in Chicago, processes oilseeds, corn, cocoa and other agricultural commodities through specific segments, including:
- Ag services and oilseeds: This segment processes oilseeds like soybeans and soft seeds, such as cottonseed, sunflower seeds, canola, rapeseed and flaxseed. It makes them into vegetable oils and protein meals.
- Carbohydrate solutions: The carbohydrate solutions segment converts corn into sweeteners, starches and bioproducts.
- Nutrition: The nutrition segment improves food, beverages, health and wellness for customers.
Archer-Daniels-Midland Co. reported $526 million in Q3 net earnings and $548 million in adjusted net earnings and a segment operating profit of $1 billion. It had an adjusted EPS up 9% despite higher effective tax rate and continued upward growth. It also offered a reported $1.48 in annual dividends to shareholders.
People Still Need Bread and Milk
What's the first thing that goes by the wayside in a high-inflation environment? Without a doubt, luxury items. But in high inflation environments (like the one we're in), people still need to buy bread and milk (and toothpaste, shampoo and soap). (Read: They'll probably buy bread and milk over, say, a new boat.) It's easy to see why consumer staples stay in demand throughout a high-inflation environment. It will always be the case that companies compensate by passing on these rising costs to consumers.
Still on the fence with a consumer staples stock purchase? Consider an ETF like Consumer Staples Sector SPDR ETF (NYSE ARCA: XLP) for a more diversified approach. Its industry exposure includes food beverage and tobacco, food and staples retailing and household and personal items.
An ETF could get you more trading flexibility, less risk, lower costs and tax benefits that will benefit you when you file your taxes next year.
Before you consider Archer-Daniels-Midland, you'll want to hear this.
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