What are we looking for?
As we move into 2015 with new opportunities and challenges ahead, we decided to focus on finding some defensive ideas for investors. So today we're evaluating consumer staples companies on the S&P 500 – largely viewed as the most tracked index in the world.
The screen
We searched the consumer staples sector on the S&P 500 and looked at the following metrics:
– A five-year average return on capital of 10 per cent or more. We calculate return on capital by dividing net operating profit after taxes by capital. We set the threshold at 10 per cent to increase our odds of finding wealth creators.
– The trailing 12-month return on capital, to compare where each company currently stands versus its five-year average.
– A minimum dividend yield of 2 per cent. We want to see whether these companies are paying a dividend to investors. We looked at the total paid out over the past 12 months.
– A positive five-year average earnings per share (EPS) growth rate.
More about StockPointer
StockPointer is a fundamental analysis tool based on an EVA (economic value added) model to quickly and easily identify investment opportunities. In addition to providing detailed reports on more than 6,500 companies (Canadian and U.S. stocks and American depositary receipts), StockPointer (stockpointer.ca) also allows investors to create personalized filters and build custom portfolios.
What did we find?
Eighteen companies made our list and most are household names. Eight come from the food industry, four from tobacco, four from household products, and only two retailers. The four tobacco stocks (Lorillard, Philip Morris, Altria and Reynolds American) are the only companies with dividend yields higher than 4 per cent, and represent an industry that socially responsible investors avoid.
Three companies that stand out based on average EPS growth over the past five years are Lorillard, Hershey and Reynolds American. A merger between Lorillard and Reynolds is expected to close in the first half of 2015.
(Note: The high EPS growth rate for Dr. Pepper Snapple reflects a depressed 2008 EPS figure due to impairment charges.)
We also found that Altria, Kimberly-Clark, Reynolds American and Kellogg have the greatest positive difference between their current trailing 12-month return on capital versus their five-year average.
Investors are advised to do additional research prior to investing in any of the companies mentioned.
Michael Cloherty is senior account manager for StockPointer at Inovestor Inc.