Why You Shouldn’t Overlook Consumer Staples When Investing
By Matt Johnson, CFA®
Investors and the media have placed a lot of emphasis on big tech, and for good reason. After all, returns have been fantastic over the last 10 years. At the same time, another sector contains a number of companies that remain overlooked while providing good value and lofty yields: consumer staples.
While the consumer staples sector as a whole does not look extraordinarily cheap, select names like Tyson Foods, The J.M. Smucker Company, and Altria Group are trading much lower than their average five-year multiples of cash flow and are producing dividend yields of near 3% or more (see figure below). (1) People are going to continue eating chicken, drinking coffee, feeding their pets, and smoking. The demand is not going away.
As markets tend to self-correct, these companies will eventually return to normal levels. In the meantime, investors have an opportunity to sit back, relax, and enjoy a handsome dividend yield.
Boring Companies Can Yield Strong Returns
Jim Collins, author of the bestselling business classic Good to Great, headed up a five-year research project where his team examined a unique body of companies and their performance during the period of 1955 to 1985. The companies in the study were unique in one regard: they showed 15 years of mediocre performance (performing at or below the general stock market average between 1955 and 1970) followed by 15 years of sustained great performance (outperforming the general stock market by a factor of three times or more between 1971 and 1985). Collins examines a number of factors including leadership, strategy, culture, and more, but there is one key takeaway about the industries of these companies: on the whole, they occupied relatively unremarkable industries. In the words of Collins himself: “In no case do we have a company that just happened to be sitting on the nose cone of a rocket when it took off.” For instance, according to Collins, if you had invested in Walgreens drug store from 1975 to 2000, your investment would have outperformed the general stock market by a factor of 15 times. Other companies included Gilette, Kroger supermarkets, and Phillip Morris (now a part of Altria Group).
Buying At A Discount
As investor Warren Buffett famously said in a letter to shareholders, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” When evaluating market sectors as a whole, there is a good bit of strategy that goes into comparing the true value of an investment and its current market price. Opinions differ on the specific approach, but the general idea is to look for undervalued assets and buy them while they are available at a discounted price. When you buy discounted securities, you have effectively made a profit at the time of purchase, rather than hoping to make a profit in the future at the time of sale.
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Matt Johnson is chief investment officer at Sage Capital Advisors, LLC, an independent, fee-only boutique wealth management firm based in San Diego, California. He spends his days working diligently to manage the investments in his clients’ portfolios so they can achieve their financial and life goals. Matt is known for his excitement for his job and the quality of care and understanding he offers his clients. He specializes in serving business owners, retirees, and Native American tribes, helping them avoid financial pitfalls so they can work toward a secure financial future. Matt has 25 years of experience under his belt, as well as a bachelor’s degree in business management from the University of South Dakota and the Chartered Financial Analyst® (CFA®) designation. In his spare time, Matt enjoys a plethora of hobbies, such as fishing, baseball, hunting, golfing, woodworking, and welding. To learn more about Matt, connect with him on LinkedIn.
(1) Source: FactSet Data From 1/13/21