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Many consumer staples stocks had an up-and-down year in 2015. Typically known for its slow-and-steady type stocks with reliable earnings growth, the consumer staples sector suffered an unusually volatile year. This was due mostly to the strengthening U.S. dollar.
The dollar rose against most international currencies such as the yen and euro, which made business conditions more difficult for large multi-national corporations that do business overseas. The consumer staples group contains many companies that were hit hard by foreign exchange headwinds this year.
Still, many consumer staples stocks did what they do best in 2015: operate global portfolios with strong brands, raise their dividends and return billions to investors through share buybacks. For investors simply looking to generate decent returns without a great deal of volatility, highly profitable consumer staples stocks could be a winning idea next year.
With their earnings and dividends set to grow again next year, here are three consumer staples stocks that could be outperformers in 2016.
Altria Group (NYSE: MO)
For investors looking for a top dividend stock in consumer staples, Altria is hard to beat. It is one of the higher-yield stocks in the consumer staples sector. It currently yields 3.9%, almost double the average yield in the S&P 500.
Altria can maintain such a hefty yield because it generates prodigious amounts of free cash flow. As a major tobacco company, Altria does not need to spend much each year to manufacture its products. Tobacco companies are banned from advertising in the U.S., which means Altria doesn’t need to allocate billions of dollars to advertising like most consumer companies.
Furthermore, cigarettes and other nicotine products are addictive, which gives Altria tremendous pricing power. Lastly, Altria operates a wide-moat business model with superb distribution and economies of scale. The result speaks for itself. Over the first nine months of 2015, Altria generated $3.9 billion of free cash flow, an impressive 20% free cash flow margin as a percentage of sales.
Altria raised its dividend 8% last year, and with such strong free cash flow, it is highly likely 2016 will bring another strong raise to investors.
Procter & Gamble (NYSE: PG)
Procter & Gamble, one of the highest profile consumer staples stocks, is at a crossroads. This year, the company made the decision to sell off a number of low-growth brands that were suffering falling sales. P&G sold its massive portfolio of 43 beauty brands for $12 billion, as part of its broader desire to sell as many as 100 brands.
While 2015 was a year to forget, 2016 could be a much better year for P&G shareholders. P&G is making progress in its turnaround. The “new” P&G will be a more focused and more efficient company. Earnings should grow next year as its divestments take effect, and thanks to P&G’s price decline from $90 to $80, the stock could be a good buying opportunity.
P&G’s current dividend yield is 3.3%. Even though earnings are down, P&G still distributes just two-thirds of its earnings as dividends. That leaves enough room to continue the company’s streak of annual dividend increases, which currently stands at 59 years in a row.
PepsiCo (NYSE: PEP)
In a wild year for many stocks, PepsiCo was about as reliable as one could find in 2015. It was another business-as-usual year for PepsiCo. The company operates a blended food and beverage businesses with world-class brands like Pepsi, Mountain Dew, Frito-Lay, Gatorade and Quaker. These globally recognized brands are projected to generate 9% growth in constant-currency earnings for this consumer staples stock this year.
In addition, this year PepsiCo raised its dividend for the 43rd year in a row, and is set to return $9 billion to shareholders in combined dividends and share repurchases in 2015.
PepsiCo is likely to have another highly successful year in 2016, thanks to continued growth in emerging markets. Last quarter alone, the company grew organic revenue by 33% in Latin America and 2.5% in Asia, the Middle East, and North Africa.
With another year of modest growth in store, PepsiCo investors should look forward to a profitable 2016.
DISCLOSURE: Bob Ciura personally owns shares of PepsiCo (NYSE: PEP).
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