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2 Consumer Staples Stocks to Buy on an October Pullback

Barchart - Tue Oct 3, 2023

From a volatility perspective, October could be every bit as nasty as September. Indeed, stock markets seem to be rolling over after a mostly upbeat spring and summer. As we move into early autumn, stocks could find themselves correcting further off the summertime peak as rates on the 10-year Treasury note continue moving higher.

Undoubtedly, the Fed's war with inflation isn't over - and it may be far from over. Given this week's ongoing rate woes, the broader basket of dividend payers seems to have been punished quite severely, with the utilities group making the biggest moves lower.

The consumer staples also took a bit of a hit, as dividend yields swelled slightly to account for the rise in government bond yields. Indeed, it's hard to call a top in the 10-year note. As the yield approaches 5%, we had better get used to more days like we're seeing now, when even the most discounted of dividend stocks slides off a slippery slope.

Understandably, the consumer staples don't look nearly as attractive as 10-year Treasury rates flirt with 5%. Still, if stability and resiliency are what you seek, the following pair of stocks seem more than worthy of keeping on your radar - and potentially buying on a continued pullback.

Let's consider two consumer staple stocks that look intriguing as investors prepare for rates to rise and stocks to stall.

Procter & Gamble

Procter & Gamble (PG) shares are right back to where they were about two years ago, trading at around $145 and change. The $342.25 billion consumer-staples heavyweight is now down 9% from its all-time high, with a nice 2.55% dividend yield.

At 24.73 times trailing price-to-earnings, the steady behemoth doesn't seem like all that great a deal right here. Not when you can get almost 5% from the 10-year. 

And as impressive as Procter's wide lineup of brands is, the firm could be at risk of falling demand, as inflation-hit consumers trade down to cheaper generic alternatives. Whether we're talking soap, shampoo, toothpaste, razors, detergent, or other goods, Procter is at risk of facing greater competitive threats as inflation continues to hurt everybody's purchasing power.

So, while Procter may be a consumer staples stock, it still has some degree of economic sensitivity attached to it. Undoubtedly, as economic tides turn, the firm is likely to benefit once consumers trade back up to their favorite household brands, as they aim for quality over affordability.

For now, I view the firm as having decent pricing power across its brands amid inflation and a potential recessionary environment. However, the longer inflation lingers, it's hard to imagine budget-constrained consumers will be all right with paying up.

Perhaps Procter may wish to spend much less on marketing campaigns to offer consumers a better value for their money at the grocery store. The company is already a smooth and efficient operator. Now, it needs to adapt to the times or run the risk of losing a bit of share to consumers who may be more inclined to reach for off-brand goods. 

Either way, the power of Procter's brands will be put to the test as consumers continue to be pained by price increases across the board.

Church & Dwight

Church & Dwight (CHD) is another consumer staples kingpin that's starting to slip again. The stock is off around 11.5% from its all-time high of nearly $104 per share, and CHD is down about 9% from its 52-week high of $100 and change. With a troubling potential head-and-shoulders technical pattern (not to be confused with the shampoo brand, owned by Procter) in the works, CHD seems like a name to consider buying on a pullback.

Should the head-and-shoulders pattern come to fruition (the stock is currently coming off its second shoulder), the stock could be headed down to $85 in a matter of weeks. Whether it's broader market volatility or something else, shares don't exactly look ripe from a technical perspective.

The business itself, though, has been quite robust, with margins and revenues climbing higher in its latest quarter. Earnings per share of $0.92 topped the consensus of $0.79, while revenue came in at $1.5 billion.

Despite the promising results, the stock looks a bit too expensive for my liking, at 29.02 times forward price-to-earnings. Further, the 1.18% dividend yield isn't much to write home about.

That said, compared to Procter's lineup, Church & Dwight seems to have products that look somewhat less susceptible to the "trading down" trend amid consumer-facing pressures. Products like Orajel and Arm & Hammer are pretty synonymous with their product categories. 

Though the brand lineup is worth a premium, I think there's too much of a premium right now. However, if a steep pullback is on the horizon, that's when I would pounce.

On the date of publication, Joey Frenette did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.