With markets seemingly alternating large swings up or down nearly every trading day for the past few weeks, investors continue to see the values of their retirement portfolios seesaw back and forth. This can be a paralyzing experience for some. As I write this, the S&P 500 is down more than 22% for the year.
I have focused acquiring shares of the safer, more recession proof stocks for my own personal portfolio, like consumer staples, health care and utilities, during this time. While COVID-19 has resulted in many states ordering people to stay home unless traveling for work, medical care or groceries, companies in these sectors are likely to better than those dependent on discretionary spending. These stocks tend to hold up better in an economic downturn as they offer products and services that consumers need to maintain their everyday life. These stocks also often offer fairly safe dividends as well, a bonus for investors requiring income in retirement.
This article will look at two companies in the consumer staples sector that have strong, recession resistant businesses and long histories of dividend growth.
Colgate-Palmolive is a leading maker of house-hold products. The company is the second-largest such company in the U.S., behind only the other stock on this list. Colgate-Palmolive's major brands include Palmolive and Ajax cleaners, Colgate toothpaste, Irish Spring and Palmolive soaps and Science Diet and Prescription Diet pet foods. The company has a current market cap of $57 billion and has lost a little more than 3% year-to-date, significantly better than the return for the S&P 500.
The company's product portfolio are those that consumers need even in a recession, which often mean that Colgate-Palmolive performs well against a tough economic backdrop. Listed below are Colgate-Palmolive's results before, during and after the last recession:
- 2007 EPS: $1.69
- 2008 EPS: $1.83 (8.3% increase)
- 2009 EPS: $2.19 (19.7% increase)
- 2010 EPS: $2.16 (1.4% decrease)
- 2011 EPS: $2.47 (14.4% increase)
Colgate-Palmolive was able to grow EPS during the last recession at a fair significant clip. And while the company saw a slight decrease in EPS in 2010, it managed to post a new high the very next year. Colgate-Palmolive managed to increase its dividend at the same time as well.
Colgate-Palmolive recently raised its quarterly dividend 2.3% to $0.44. The company annual increases have usually been $0.01 per quarter for the past few years. The $1.76 annual dividend equates to a 2.6% yield as of the 3/30/2020 close.
What the company lacks in dividend growth and high yield, Colgate-Palmolive more than makes up for in its dividend growth streak. The company has now increased its dividend for 57 years in a row following the most recent increase. Colgate-Palmolive is just one of 30 Dividend Kings, a group of stocks with at least 50 consecutive years of dividend growth.
Removing 2015 from the equation when EPS was cut in half and the payout ratio spiked higher, Colgate-Palmolive has had an average payout ratio of 59% since 2010. This is in-line with the current payout ratio. Using analysts' EPS estimates of $2.93 for 2020, Colgate-Palmolive has an EPS payout ratio of 60%.
Colgate-Palmolive closed Monday's trading session at $66.58, giving the stock a forward P/E ratio of 22.7. If the stock were to average this multiple for the entire year then this would be the cheapest valuation for Colgate-Palmolive since 2012. Shares have an average P/E of 23.5 over the last decade.
Procter & Gamble (NYSE:PG)
Procter & Gamble is global giant in the consumer staple sector. The company has operations in more than 180 countries and offers well-known products such as Tide laundry detergent, Crest toothpaste, Head & Shoulders shampoo and Gillette razors and shaving cream. The company has a market capitalization of $284 billion. Shares are off just 7.4% so far in 2020.
As with Colgate-Palmolive, Procter & Gamble held up much better than most companies in the last recession.
- 2007 EPS: $3.04
- 2008 EPS: $3.64 (19.7% increase)
- 2009 EPS: $3.58 (1.6% decrease)
- 2010 EPS: $3.53 (1.4% decrease)
- 2011 EPS: $3.93 (11.3% increase)
Procter & Gamble posted a nearly 20% increase in EPS in 2008 before two years of low declines. The company did make a new high in 2011 and has generally seen its EPS grow in the time since. And, of course, the dividend continued to grow as well during this period of time.
With 63 consecutive years of dividend growth, Procter & Gamble has an even longer dividend growth streak than Colgate-Palmolive. Procter & Gamble is also a member of the Dividend Kings index and has the fifth longest dividend growth streak among U.S. companies.
The company usually announces an increase in early April, so investors should receive word of a raise in the next two weeks or so. The last two increases were each for 4%. The current annualized dividend totals $2.98, giving the stock a yield of 2.6%.
Procter & Gamble has averaged a payout ratio of 61% since 2010. The payout ratio based on EPS estimates of $4.96 for the year is 60%. Assuming that the company gives another 4% increase, the payout ratio goes to 62%.
Shares of Procter & Gamble closed Monday's session at $115. This gives the stock a forward P/E ratio of 23.2, which would be its most expensive valuation in more than 15 years if averaged for the whole year. This is a premium to the stock's 10-year average P/E of 19.2.
Investors look for a safe place to park capital during the swings of the market should look to the consumer staples sector. These companies perform much better when the economy is down as consumers need every day items like shampoo and toothpaste. These companies often have multiple decades of dividend growth as well due to the steady nature of their businesses.
Colgate-Palmolive may not offer a huge dividend yield, but the company's consistency in difficult times is exactly what investors should be looking for from a consumer staple right now. Shares of the company are also trading at a lower than usual valuation.
Procter & Gamble is a very stable company that doesn't usually see drastic declines in profit when the economy is in a downward spiral. That said, shares are more expensive today than they have been in quite some time.
Because of valuation, I believe Colgate-Palmolive to be the better buy today while I am waiting for a pullback before adding to my Procter & Gamble position.
Disclosure: The author is long Procter & Gamble.
This article first appeared on GuruFocus.