You don’t need a book to understand how a sector works. What you need is a clear research policy that tells you what is important and how to make the best investment decisions. The consumer defense sector is particularly interesting in times of uncertainty. Let’s discuss their biggest strengths and weaknesses and see how you can get the most of them.

Cult brands and constant cash flows

Consumer defensive stocks also have a second name: consumer staples. When we talk about consumer staples, we often describe them as all of the products that you can find in your home. These are products that you have to buy no matter what happens in your life. These companies have built outstanding brand portfolios that support repeat purchases. Repeatable purchases result in constant and predictable cash flows. Hence, food, beverage, and household products could be an excellent foundation on which to build a dividend growth portfolio. If you are concerned about the current economic climate, add some defensive consumer stocks to your portfolio.

Subsectors (industries)

Greatest strengths

If you’re looking for somewhere to stash your money in troubled times, forget about your mattress. Consumer defensive stocks are defensive indeed. When the market panics, this part of the stock markets is usually not a cause for concern. We have clearly seen how grocery and discount stores have performed during the pandemic. In addition to health services, they were the first to be labeled “essential businesses”.

In addition to the sale of “essential goods” (we could discuss how alcoholic and tobacco products are considered essential at another point in time), this sector also has another great feature. Most industries have built their business model on repetitive sales. What could be nicer for a dividend investor than finding a company that sells the same products to the same consumers every week? We can call that a cash cow.

Over the years, many of these companies have built iconic brands. You will even find companies that manage portfolios of billions of dollars worth of brands. Such big brands have economies of scale and a broad distribution network. This raises the barriers to entry to a higher level. This also gives many investors a sense of calm as they can count on their dividend no matter what. Even better, when people lose their jobs, they will keep buying these brands!

Big weaknesses

Growth is often a problem for this sector. When the emerging economies came into play, they all rode the wave and discovered new playgrounds. As these markets grow, local competitors emerge. Smaller players cannot keep up in price and scope. However, they are more flexible and know their customers better than the “gringos” from North America. Buy America or buy locally is not just a slogan we have here in our countries. It’s a movement that goes around the world.

Speaking of competition, it’s coming from everywhere now. Beverage manufacturers are turning to snacks and packaged groceries, while some discounters introduced packaged groceries first before turning into full-fledged grocery stores. Such a competition initially led to a shelf war in which products had to compete against each other for top position in the shops. This has now shifted to the online world where online shopping has reached all industries.

These “old” companies also have to adapt to e-commerce. Many of these companies face similar challenges as cyclical consumers when it comes to handling digital sales. Even groceries have to invest massively in their online platform so that consumers can order their groceries and collect them in-store.

How to make the most of it

It is difficult to pinpoint a good time to buy defensive consumer stocks as they are rarely “for sale”. When everyone in the market is making money and growth stocks are getting the most love, you have a chance to buy unloved consumer staples. This is the type of investment that you will almost regret making the investment in a bullish year. They often lag behind and show minimal growth during the boom times. On the flip side, if panic spreads, these companies will keep going and make sure your portfolio doesn’t break.

Most industries are best for high income investors.

Favorite selection

Costco (COSTS)

  • Market capitalization: 160B
  • Yield: 0.76%
  • Revenue growth (5 years, annualized): 7.49%
  • EPS growth rate (5 years, annualized): 10.93%
  • Dividend growth rate (5 years, annualized): 12.33%
Source: Costco presentation

Business model

Costco, the leading warehouse club, had 795 stores worldwide at the end of fiscal 2020. Most of the sales are in the United States (73%) and Canada (13%). It sells memberships that allow customers to shop at its warehouses, which offer low prices on a limited range of products. Costco is primarily aimed at individual buyers, but approximately 20% of paid members have business memberships. Groceries and sundries accounted for 42% of sales in fiscal 2020, with hardlines accounting for 17%, ancillary businesses (such as fuel and pharmacies) nearly 17%, fresh groceries 14% and softlines accounting for 10%.

Investment thesis

Costco has a unique business model: the members are convinced that they have made the best possible offer with their two baskets full of goods. It’s convenient to do your grocery shopping, buy your TV for the Super Bowl, buy your trainer shoes for your 10km, and pick up the medicine for your little one … all in the same place! Costco is the all-you-can-eat business. It’s also one of the few retailers to claim everything is going well without it being a white lie. COST shows strong sales growth for the decade. The business model will continue to grow, and since customers are also members, they tend to prioritize their purchase from Costco. With over 90 million members and a renewal rate of around 90%, COST is a stable choice for your portfolio.

Procter & Gamble (PG)

  • Market capitalization: 330B
  • Yield: 2.30%
  • Revenue growth (5 years, annualized): -2.46%
  • EPS growth rate (5 years, annualized): -10.86%
  • Dividend growth rate (5 years, annualized): 11.40%
Source: PG Instagram

Business model

Since its inception in 1837, Procter & Gamble has grown to become one of the world’s largest manufacturers of consumer goods, with annual sales of nearly $ 70 billion. The company works with a number of leading brands, including 21 with annual sales of more than $ 1 billion worldwide, including Tide Laundry Detergent, Charmin Toilet Paper, Pantene Shampoo, and Pampers Diapers. P&G sold its last remaining grocery brand, Pringles, to Kellogg in 2012. Sales outside the home country account for around 55% of the company’s consolidated total, with around a third coming from emerging markets.

Investment thesis

When buying PG stock, your goal must be to have a steady and increasing flow of income. Procter & Gamble is likely more stable than most bonds and pays a higher rate of return. There are no immediate threats that could threaten the dividend in the future. PG is a strong core investment no matter how much you pay for it. With the company still on the verge of transitioning out of the brand portfolio, it may be a good time to take a position. We can clearly see that a trend has been developing since mid-2018. With the market volatile, PG is the type of company that will continue to pay its debts with no worries. It’s no surprise to see such hype surrounding the stock.

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