As the Coronavirus grips much of the world, global travel and commerce have come to a screeching halt. The last thing people want to think about is getting on an airplane, checking into a hotel or spending money on the latest fashions. They are concerned about sourcing food, cleaning supplies, and the holy grail – toilet paper.
Investors have long been drawn to consumer defensive stocks during economic uncertainty. This sector encompasses food, beverages, personal products, non-durable household goods and food/drug retailers. The sector is not cyclical, meaning we need to use these products whether the economy is lagging or thriving. Demand is usually fairly constant, except when there is concern that the supply chain may be broken. Hence the hoarding of toilet paper in the current climate.
Consumer stocks are frowned upon when the economy is hot, as the upside is limited. Investors then want to pile into high flying growth stocks, hoping for market-trumping returns. However, in a slowing or recessionary environment, these consumer defensive stocks offer stability and solid dividends. Consumers still do their laundry, buy groceries, cook dinner and fill prescriptions.
With Coronavirus overtaking the world, we are witnessing panic buying. Millions of people are being ordered to stay in their homes until the virus stabilizes. Canned soup, peanut butter, pasta, cereal and paper towels – products that saw flat growth before – are now hard to get a hold of. The sector’s relative safety has pushed investors into these stocks, thus making valuations less compelling. While this sales boom is likely temporary, owning some consumer defensive stocks in your portfolio can bring peace of mind along with an attractive dividend stream.
Slow Top-Line Growth – Low single-digit top line growth has been the norm for many of these companies, especially those with dated product lines. While there is a nostalgia factor, not as many people crave a can of soup or processed cheese as a decade ago. Innovative companies with unique products can bump up their growth rates.
Highly Competitive – Amazon’s (AMZN) push into the grocery sector and growth of super club stores have put pressure on grocers and food processors. Margins have lost that comfortable cushion and become razor thin, which places a priority on innovation, efficiency and economies of scale.
Price Sensitivity During Uncertain Times – As much as consumers love their Cheerios and Tide brands, there is a premium price paid for those products. Brand names can become vulnerable during tough economic times as shoppers trade to lower priced generic and value names.
Limited Pricing Power – Continuing with the with the generic/value concept, many companies find it hard to implement price increases given shoppers’ incentive to turn to value brands. Downsizing the package has been a popular technique. That box of Cheerios you pick up may still be the same price but may contain less product. Retailers continue to cut costs, which helps counter this problem.
Shift to Healthy and Green Initiatives – Americans, and consumers all over the world, have become more invested in their health over the past few years. Canned and frozen goods have taken a hit, as shoppers reach for freshly prepared and more healthy options. Interest is also growing in green or sustainable offerings, which provide health benefits while protecting the environment. While organic meats and produce were the initial focus, shoppers now want cage-free eggs and farming practices that leave less of a negative impact on the environment.
Online Shopping – The Coronavirus crisis has emphasized the importance of food retailers having an online procurement and shipping process. As Americans are on lockdown, few want to venture to the store even though it is deemed an essential service. Many of us are spending a good chunk of our day trying to get a delivery slot for groceries from our local provider. Here Amazon (AMZN) has the competition beat through its Whole Foods subsidiary and top-notch delivery system. It is a strong competitive advantage.
The Coronavirus lockdown has people panic pantry stocking, which is driving sales increases. We can expect things to normalize when the world ultimately normalizes. In the meantime, here are some investment ideas in the sector.
Kraft Heinz (KHC)*: Two of America’s best-known brands consolidated but the results have been mixed. KHC is the third largest food company in North America and fifth worldwide. Its brands had been neglected, causing market share losses and profit margin erosion. New management is focused on restoring the brands’ luster. Opportunities for international expansion are also solid. Meanwhile, the company pays out a rich 6.8% annual dividend.
Kroger (KR)* – Grocer Kroger had been the victim of Amazon’s push into the grocery market through its acquisition of Whole Foods. KR lost half of its value from 2015-2017. However, the company rose to the challenge and invested heavily in technology, warehousing and online grocery services. The store’s proprietary brands are doing well, encompassing nearly 20% of revenue. KR manufactures 43% of its own private label brand offerings. It is also experimenting with offering the current trend of plant-based meat products. The stock yields 2%.
Molson Coors (TAP)*: TAP is the second largest brewer in both the U.S. and Canada, as well as the number five global beer producer. It owns such popular brands as Coors, Blue Moon, Miller, and Molson. Tastes have been changing in the spirits industry, as wine, spirits, craft beers, and even hard seltzer have tempered traditional beer consumption. New management swiftly announced a restructuring plan in the fourth quarter of 2019. This company remains attractive for its distribution reach, strong product line and durability during tough economic times. It may also be an attractive acquisition target and currently yields 6%.
Unilever (UL)*: This consumer staples company boasts some of the world’s best-known brands, including Knorr soups and sauces, Hellmann’s mayonnaise, Lipton tea, and Dove soap. It has also made some innovative acquisitions, including the Dollar Shave Club. UL’s dividend is 3.8%, and that dividend has grown 10% in the last year, nearly 7% annually over the last decade. This is a solid, well-run company.
Walgreens Boot Alliance (WBA)* – Walgreens is a global retail pharmacy giant, operating over 15,000 locations in the US and 25 countries. Walgreens held the honor of being the DJIAs worst performing stock in 2019, down 11% in a very up market. WBA’s recent results have been mixed, as the company struggles with reimbursement issues, a tough operating environment, margin pressure and investor skepticism. However, the company’s focus is shifting to strategic alliances with healthcare partners, which bodes well given trends in healthcare. The stock yields 4%.
*All stocks are owned by DG Dietze and Point View clients
Note: Elaine Phipps, MBA, CFA, is a Portfolio Manager at Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit.
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