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Consumer staples stocks could be getting a little long in the tooth. Meaning, a whirlwind of merger and acquisition activity, along with income-starved investors chasing steady dividends, has pushed the valuations of the consumer staples sector to historical highs.
The price-earnings ratio for the consumer staples sector is right at 22. That’s well above the sector’s 10-year average P/E ratio of 17.3, and also above the 20-year average of around 20.
The sector’s P/E ratio is also at a premium to the S&P 500 P/E of 20.5. Given their defensive nature and steady dividends, you usually see consumer staples trading at a discount to the market.
The other concerning thing is that consumer staples valuations are getting stretched, but consumer staples stocks are still underperforming the market. Over the last three years the Consumer Staples Select Sector SPDR ETF (NYSEArca: XLP) has underperformed the S&P 500 by 11.5%.
Stock price growth is outrunning earnings growth, which is generally a bad recipe in a low growth industry.
However, there are a handful of consumer staples stocks out there that are still relatively cheap, with P/E ratios below 20 and growth opportunities to fend off a broad selloff of the consumer staples industry. Here are the top three consumer staples value stock picks:
No. 1 Consumer Staples Value Stock: Wal-Mart (NYSE: WMT)
Just about a month ago I predicted a Wal-Mart turnaround, following the retail giant’s announcement that it would raise its minimum wage to $9 an hour. My thesis then was that better-paid employees would create a better in-store experience.
But there’s a lot more to the Wal-Mart story. This includes its massive scale and ability to source goods cheaper than competitors, which allows it to be the low-cost retail leader in addition to being a one-stop shop. Let’s not forget its foray into the small-store format, which includes its Neighborhood Market stores that are meant to fend off the likes of Dollar General (NYSE: DG).
Wal-Mart trades at a P/E multiple of 16, and with 40 years of consecutive annual dividend increases and a solid 2.4% dividend yield, look for the company to continue attracting shareholders looking for stable stocks.
No. 2 Consumer Staples Value Stock: Archer Daniels Midland (NYSE: ADM)
Archer Daniels is a major agriculture player. It leverages its large storage and processing network to buy, process and then sell commodities. Basically, it purchases crops and then sells them to food and energy businesses. It’s a simple business model (on paper) that has been a steady revenue generator for Archer Daniels for a number of years.
Yet, Archer Daniels is also one of the smaller players, relative to peers. The key growth opportunity for the company is to break into the international markets. It tried buying GrainCorp in Australia but was blocked. Look for Archer Daniels to keep searching the international markets for expansion opportunities.
Archer Daniels trades at a P/E of 14 and has upped its dividend for 39 straight years. Its current dividend yield stands at 2.2%.
No. 3 Consumer Staples Value Stock: Philip Morris International (NYSE: PM)
In early April, I called Philip Morris International one of the three must-own S&P 500 dividend stocks. Shares are higher by 8% since then on a strong earnings report. But it’s still enticingly cheap, trading at a P/E ratio of 18.
As a seller of tobacco products, the company takes a lot of heat for being a “sin stock.” But it’s still a very profitable business to be in – especially when you own nearly 30% of the global tobacco market. And with that leadership position, Philip Morris International generates industry leading margins and return on invested capital.
Emerging markets are proving to be an impressive growth opportunity for Philip Morris International – namely Asia. The beauty of these markets is that government regulation has been nonexistent, meaning consumers aren’t intimidated against using tobacco products.
Philip Morris International also pays a hefty 4.75% dividend yield and has seven years of dividend increases under its belt.
Time to move on up – to Dividend Avenue
It’s one of the ritziest addresses in America – and the companies that call this place home pay out some of the fattest yields in the market. With the average yield of the Dow down to 2.1%… we’ve found an opportunity on “Dividend Avenue” that pays a whopping 12%! And you can start collecting big monthly dividends and additional payouts every 30 days.