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What are we looking for?

U.S. consumer defensive stocks that are growing their dividends.

The screen

Although the consumer defensive sector – companies producing staples such as food, beverages and non-durable household and personal items – may not currently show attractive growth prospects when compared with other sectors, it has certainly stood its ground over multiple market corrections. In 2008, for example, when the S&P 500 Total Return Index lost 37 per cent, the S&P 500 Consumer Staples Total Return Index declined 15.4 per cent. In more recent memory, calendar year 2018 showed a total return of minus 4.4 per cent for the broad S&P 500 but the consumer staples index posted a positive total return of 0.8 per cent.

This week, I use Morningstar CPMS to look for U.S.-listed consumer defensive stocks that are growing their dividends by first ranking all consumer defensive companies (today consisting of 111 companies) on the following metrics:

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  • Expected dividend yield;
  • Three-year dividend growth rate (on average, how much dividends have grown in each of the past three years);
  • Expected dividend growth rate (the expected dividend that the company has announced but not yet paid, compared against trailing dividends);
  • Five-year earnings-per-share deviation (a stability metric measuring how consistent earnings have been over the past five years, lower figures preferred);

To qualify, stocks must have a market capitalization greater than US$1.3-billion (this figure meant to exclude the bottom one-third of stocks, by size, in the universe). Additionally, stocks must have a payout ratio on earnings less than 70 per cent and a payout ratio on cash flow less than 60 per cent as a way to ensure yields are sustainable.

More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 120 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used Morningstar CPMS to back-test this strategy from April, 2004, to May, 2019. During this process, a maximum of 10 stocks were purchased and equally weighted. Once a month, stocks were sold if their rank fell below the top 35 per cent of the universe, or if the company cut dividends, or if payout ratios exceeded 90 per cent of earnings or 70 per cent of cash flows. When sold, the positions were replaced with the highest ranked stock not already owned in the portfolio.

Over this period, the strategy produced an annualized total return of 11.1 per cent while the S&P 500 Consumer Staples Total Return Index advanced 8.9 per cent. In the trailing 12-month period ended May 31, 2019, the strategy produced 19.2 per cent while the index gained 15.6 per cent.

The stocks that qualify for purchase today are listed in the table below. It is always recommended to speak to a financial adviser or investment professional before investing.

Select U.S.-listed consumer staples stocks

RankCompanyTickerMarket Cap (US$Mil)5Y EPS DeviationDiv. Yield (%)3Y Div. Growth Rate (%/Yr)Expected Div. Growth Rate (%)Payout Ratio on Earnings (%)Payout Ratio on CF (%)Recent Price (US$)Total Return from Month End, 12M Ago (%)
1Tyson Foods Inc.TSN-N 28,685.4 4.61.936.011.123.015.478.6316.3
2Coca-Cola EuropeanCCEP-N 27,145.6 5.32.418.211.746.233.057.4144.5
3Mondelez InternationalMDLZ-Q 79,886.6 3.31.915.84.040.737.755.4637.2
4J&J Snack Foods Corp.JJSF-Q 3,073.8 2.51.28.95.340.324.7163.358.4
5Strategic Education Inc.STRA-Q 3,939.6 15.01.1352.114.334.935.1179.6360.7
6J.M. Smucker Co.SJM-N 13,774.2 3.72.86.22.145.537.0121.115.8
7Costco Wholesale Corp.COST-Q 117,577.6 5.61.013.110.230.018.5267.3529.1
8Church & Dwight Co. Inc.CHD-N 18,801.3 3.61.210.43.437.628.576.3645.3
9McCormick & Co. Inc.MKC-N 20,589.2 5.31.510.57.041.732.9155.9736.2
10Target Corp.TGT-N 44,168.4 9.03.12.83.945.222.386.2116.6

Source: Morningstar CPMS

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

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