Skip to main content

What are we looking for?

U.S. consumer defensive stocks that pay dividends.

The screen

Despite the U.S.-China trade war and an inverted yield curve, the U.S. economy seems to be trucking along. Since the start of the year, U.S. GDP has increased and U.S. unemployment, after creeping up to 4 per cent in February, is now back at 3.7 per cent (very close to where it was in 2000 prior to the tech bubble).

In theory, an economy like this, coupled with low interest rates, suggests that the trajectory of U.S. consumer spending should remain steady, all else being equal. As the name implies, consumer defensive stocks (makers of food, beverages and household products) are often less volatile than consumer cyclical stocks (typically providing good and services tied to the economy such as automobiles, restaurants and residential construction).

Story continues below advertisement

For dividend investors wary of current market volatility, this week I look for companies in the U.S. consumer defensive sector (today consisting of 114 names in the CPMS U.S. database) that show a good combination of the following metrics:

  • Dividend yield;
  • Free cash flow yield (calculated as operating cash flow in excess of capital expenditures over enterprise value, higher figures preferred);
  • Expected annual dividend growth rate (calculated from announced future dividends from the company but not yet paid);
  • Return on equity.

To qualify, companies must have a market capitalization greater than US$1.3-billion (this figure is meant to exclude the bottom one-third in this sector by market cap). Additionally, to qualify, companies must have a dividend payout ratio against earnings and cash flows of less than 80 per cent and 60 per cent, respectively. These limits were used to ensure that dividends 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 February, 2007, to September, 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 25 per cent of the universe, if ROE turned negative, or if the dividend payouts breached the aforementioned limits. 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 15 per cent while the Morningstar U.S. Consumer Defensive Index rose 10 per cent on a total return basis.

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 consumer-defensive dividend payers

RankCompanySymbolMkt. Cap. (US$ Mil.)Div. Yld. (%)FCF Yld. (%)Expected Div. Grth. Rate (%)Trailing ROE (%)Payout Ratio on EPS (%)Payout Ratio on Oper. CF (%)Recent Close (US$)Ttl. Rtn. from Month End, 12M Ago (%)
1Molson Coors BrewingTAP-N12,263.04.06.139.07.550.918.156.68-8.6
2Clorox Co.CLX-N18,636.32.93.710.4116.068.850.1148.211.8
3Walgreens BootsWBA-Q49,234.93.47.04.021.730.525.254.515-29.4
4Hershey Co.HSY-N31,969.22.03.77.188.350.435.4152.5445.1
5Keurig Dr. PepperKDP-N38,727.42.24.233.37.242.939.727.538.2
6Kroger Co.KR-N19,487.42.63.014.321.127.410.024.31-16.4
7Flowers Foods IncFLO-N4,632.23.54.44.115.973.843.121.917.2
8Nu Skin EnterprisesNUS-N2,328.03.56.30.724.642.728.141.91-38.2
9J.M. Smucker Co.SJM-N12,240.73.34.73.510.742.336.5107.332.3
10Colgate-Palmolive *CL-N58,687.62.54.01.828,500.057.348.268.417.0

Source: Morningstar CPMS

*Note that CL shows an exorbitantly high ROE because of its negative book value of equity. This extreme value was accounted for in the analysis.

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

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Report an error Editorial code of conduct
Tickers mentioned in this story
Unchecking box will stop auto data updates
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter
To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies