Published by Bob Ciura on August 24th, 2017
The food and beverage industry enjoys several qualities that make it a good source of dividend growth stocks.
First, is the simple reality that everyone has to eat and drink. The strongest food and beverage companies capitalize on this, through steady demand and pricing power.
Their incredible stability lets them pay dividends, and increase their payouts each year. This article will discuss the five top dividend stocks in the food and beverage industry, each of which has a long history of dividend growth.
Three of the five stocks on this list are Dividend Aristocrats, a group of 51 companies in the S&P 500 Index with 25+ consecutive years of dividend increases.
The other two stocks on this list are Dividend Achievers, which have recorded 10+ consecutive years of dividend increases.
Food and beverage companies are also well-equipped to continue raising dividends each year, even if another recession hits.
All five are best-in-class food and beverage stocks, with strong brands and reliable dividend payouts.
Food & Beverage Stock #5: General Mills (GIS)
Dividend Yield: 3.4%
General Mills, which has paid a dividend for 117 years. It has increased its dividend for more than 10 years in a row. The current yield of 3.4% is well above the 2% average yield for the S&P 500.
The combination of over 100 years and a 3%+ dividend yield, places General Mills on Sure Dividend’s list of blue-chip stocks.
General Mills generates over $15 billion in sales. Its core brands lead their respective categories, especially when it comes to cereal. General Mills possesses the #2 market share in cereal, with 3 of the top 5 cereal brands in the U.S.
Source: Investor Day Presentation, page 9
Changing consumer behavior is one of the constant themes in the food and beverage industry today. Consumer spending is shifting from packaged, shelf-stable goods, toward for fresher alternatives such as natural foods, and organics.
Snacks are still growing, but at the expense of items like cereal. General Mills’ net sales fell by 6% in fiscal 2017. Some of this was due to the strong U.S. dollar. But, even after excluding currency, sales declined by 4% for the year. Organic sales declined 5% in the core North America retail segment.
These changes in consumer appetites prompted General Mills to switch focus. It is steering investment to its highest perceived growth opportunities, which include snack bars, Haagen-Dazs, and Old El Paso. Haagen-Dazs is a top performer, particularly in the emerging markets.
Source: Investor Day Presentation, page 16
General Mills management expects mid-single digit growth from Haagen-Dazs over the next three years.
Growth in these products will help offset weakness in cereal. Earnings will also increase from cost cuts. Cost reductions drove a 6% adjusted earnings-per-share increase in fiscal 2017.
In fiscal 2018, net sales are expected to decline 1%-2%, but adjusted earnings-per-share are expected to rise 1%-2%.
The stock appears to be slightly undervalued. General Mills had adjusted earnings-per-share of $3.08 in fiscal 2017. This means the stock has a price-to-earnings ratio of 18.7.
The stock trades at more than a 20% discount to the S&P 500 Index valuation. The stock might be cheap, given its brand strength and earnings growth potential.
Food & Beverage Stock #4: The Coca-Cola Company (KO)
Dividend Yield: 3.3%
Coca-Cola has one of the longest streaks of dividend increases in the entire stock market. It has increased its dividend for 55 years in a row. Not only is Coca-Cola a Dividend Aristocrat, but it is also a Dividend King. The Dividend Kings are a small group of just 19 stocks, with 50+ consecutive years of dividend increases.
Coca-Cola is struggling, due to declining soda consumption. Volumes of carbonated soft drinks fell 0.8% in 2016. Soda consumption is at a 31-year low in the U.S.
This has significantly impacted Coca-Cola’s sales in recent years, since it has over 50% global market share in sparkling beverages.
Source: 2017 CAGNY Presentation, page 15
In response to falling soda sales, Coca-Cola has broadened its beverage portfolio into energy drinks, dairy, teas, juices, and water.
Growth in these categories has helped lift the overall results. In 2016, Coca-Cola grew organic revenue by 3%. Adjusted earnings-per-share increased 5% for the year.
Steady growth has continued this year. Last quarter, revenue adjusted for currency and refranchising of Coca-Cola’s bottling operations, increased by 4%.
Growth was spread across its geographic markets. Organic revenue increased 6% in Europe, the Middle East, and Africa, followed by 5% growth in North America.
Price increases are a key driver of international revenue growth for Coca-Cola, particularly in the emerging markets. In North America, pricing increases and new packaging solutions contributed to revenue growth. This is an advantage of Coca-Cola’s foothold in the emerging markets.
The environment is difficult for soda sales in the U.S., but Coca-Cola remains the #5 most valuable brand in the world. Such a strong brand improves the chances of a successful turnaround.
Another positive for Coca-Cola, is that it holds up well during recession. Consumption of soda tends to be insulated from economic downturns. Coca-Cola’s earnings-per-share during the Great Recession are below:
- 2007 Earnings-per-share of $1.29
- 2008 Earnings-per-share of $1.51 (17% increase)
- 2009 Earnings-per-share of $1.47 (3% decline)
- 2010 Earnings-per-share of $1.75 (19% increase)
From 2007-2010, Coca-Cola increased earnings-per-share by 36%.
Coca-Cola’s near-term growth could be limited, due to its heavy exposure to soda. Sparkling beverages made up more than 70% of Coca-Cola’s worldwide unit case volume in 2016.
That said, investors can feel reasonably assured the company will continue increasing its earnings and dividends each year.
Food & Beverage Stock #3: Kellogg (K)
Dividend Yield: 3.1%
Like General Mills, Kellogg is also struggling from weak cereal sales. Kellogg’s total sales declined by 1.1% in 2016. Kellogg is similarly adapting to changing consumer preferences, by investing in new categories.
The major difference between the two companies, is that Kellogg appears to have had far more success thus far, by investing more aggressively in snacks.
Kellogg has a large snacks portfolio, including cookies, crackers, toaster pastries, and frozen waffles. The core brands include Kellogg’s, Keebler, Cheez-It, and Pringles.
It has significantly reduced its cereal business, relative to snacks. Snacks continue to be a growth catalyst for Kellogg, and generate half of the company’s total sales.
Source: Deutsche Bank Global Consumer Conference, page 4
Kellogg acquired Pringles in 2012 from Procter & Gamble (PG). From 2014-2016, Pringles grew sales by 6% per year.
Cheez-It and Rice Krispies Treats are also performing very well. In the trailing four fiscal years, sales of Cheez-It and Rice Krispies Treats rose 6% and 7% per year, respectively.
In addition to growth from snacks, profits are growing from cost cuts. Operating profit margin expanded by 130 basis points over the first half of 2017, which helped fuel 11% adjusted earnings growth in that time.
Source: Q2 Earnings Presentation, page 7
For 2017, net sales are expected to decline about 3% from 2016. But thanks to cost cuts and share repurchases, earnings-per-share growth is expected in a range of 8%-10% for 2017.
This is very strong earnings growth from a large packaged foods company, and means Kellogg should continue to grow its dividend each year.
Kellogg is a very consistent dividend growth stock. It recently increased its quarterly dividend by 4%, and has paid 371 consecutive dividends since 1925.
Plus, Kellogg could be a decent value. Adjusted earnings-per-share were $3.74 per share in 2016. As a result, shares trade for a price-to-earnings ratio of 18.4, which is a significant discount to the S&P 500 Index.
The combination of 8%-10% earnings growth plus a 3% dividend, means Kellogg could generate double-digit annual returns, in addition to any returns from an expanding price-to-earnings ratio.
Food & Beverage Stock #2: Hormel (HRL)
Dividend Yield: 2%
Hormel has a very long history of dividend growth, with high growth potential going forward.
Hormel has increased its dividend for 51 years in a row. It is a Dividend King, along with Coca-Cola. It has paid 356 consecutive quarterly dividends without interruption, ever since it first went public in 1928.
It has a lower dividend yield that the other stocks on this list, but it makes up for this with high dividend growth rates. In the past five years, Hormel increased its quarterly dividend at an 18% compound annual rate.
Hormel has achieved this impressive dividend history, thanks to a large and diversified brand portfolio.
Source: Investor Day Presentation, page 3
Some of its core brands include Hormel, Skippy, Spam, Justin’s, Dinty Moore, and Applegate. In all, Hormel has 30 brands with the #1 or #2 market share in their respective categories.
The company operates in five segments:
- Refrigerated Foods (47% of sales)
- Jennie-O Turkey (21% of sales)
- Grocery Products (19% of sales)
- Specialty Foods (8% of sales)
- International & Other (5% of sales)
Hormel has an impressive track record of growth. It has grown earnings in 28 out of the past 31 years. Adjusted earnings-per-share rose by 24% in 2016.
Hormel’s impressive earnings growth allows it to increase its dividend at such high rates. Furthermore, Hormel has high appeal as a dividend stock, because it could continue to grow earnings and dividends, even during recessions.
Hormel’s earnings-per-share through this period are shown below:
- 2007 earnings-per-share of $0.54
- 2008 earnings-per-share of $0.52 (3.7% decline)
- 2009 earnings-per-share of $0.63 (21% increase)
- 2010 earnings-per-share of $0.76 (21% increase)
After a modest decline in 2008, Hormel achieved 20%+ earnings growth in the next two years. It would likely be among the out-performers during a recession.
Hormel has plenty of growth potential going forward, thanks to its acquisition strategy. Hormel has a major presence in natural and organic foods, thanks to its acquisitions of Justin’s and Applegate.
The Applegate acquisition is particularly promising.
Source: Investor Day Presentation, page 16
Hormel’s natural refrigerated foods portfolio increased sales by a nearly 5% compound annual rate, from 2013-2016. Many of its individual products are growing at very high rates. For example, through April 22nd, sales of Applegate bacon, hot dogs, and pork sausage rose by 8.5%, 7.4%, and 14.3%, respectively, in the trailing 52 weeks.
Hormel is struggling with falling turkey prices, which caused earnings-per-share to decline by 2.5% in the second quarter. However, the company’s long-term growth prospects are still very good, thanks to investments in food categories with growing demand.
Hormel has a 2% dividend yield and the potential for 10% annual dividend increases going forward. In addition to a very stable business model, Hormel is a great pick for dividend growth investors.
Food & Beverage Stock #1: PepsiCo (PEP)
Dividend Yield: 2.8%
PepsiCo earns the #1 spot on the list. It has very strong brands, the best snacks business, a nearly 3% dividend yield, and more than 40 years of consecutive dividend increases. With all this, it offers the best mix of growth and income.
PepsiCo is a Dividend Aristocrat, and has increased its dividend for 45 years in a row.
The company is struggling from the same challenge as Coca-Cola, which is the decline in soda consumption. But like Coca-Cola, PepsiCo has expanded its beverage portfolio. Its lineup of non-sparkling brands includes Aquafina, Pure Leaf, Tropicana, and Gatorade.
Source: 2017 CAGNY Presentation, page 3
Plus, PepsiCo has a lineup of top-tier snacks brands. Snacks are arguably the most attractive product area in the food and beverage industry today, and PepsiCo dominates the category. It owns Frito-Lay and Quaker, among a number of smaller brands.
In all, PepsiCo’s total revenue is split almost evenly between food and beverages. This has allowed PepsiCo to grow revenue and earnings, despite the declines in soda. For example, organic revenue and adjusted earnings-per-share increased 4% and 9%, respectively, in 2016.
PepsiCo is off to a good start to 2017. Organic revenue increased 2.6% over the first half, and adjusted earnings-per-share increased 10%. Volumes of foods and snacks increased 2% in that time, which more than offset a 1% decline in soda.
Within snacks, PepsiCo is well-positioned to grow in the healthier foods segment. The company has a collection of brands that appeal to more health-conscious consumers, including Naked, Sabra, and Kevita.
PepsiCo has 22 individual brands that each generate more than $1 billion in revenue each year. This helps cushion PepsiCo’s profitability, even when the economy goes into recession. PepsiCo is another example of a company that performed very well during the Great Recession:
- 2007 Earnings-per-share of $3.34
- 2008 Earnings-per-share of $3.21 (3.9% decline)
- 2009 Earnings-per-share of $3.77 (17% increase)
- 2010 Earnings-per-share of $3.91 (3.7% increase)
PepsiCo’s earnings-per-share declined only modestly during the recession, and recovered quickly once the recession ended.
PepsiCo is an all-around great dividend growth stock. It has virtually all of its bases covered across the food and beverage spectrum. It should continue to grow revenue and earnings each year, no matter which direction the consumer winds blow.
In the past four reported quarters, PepsiCo had adjusted earnings-per-share of $5.04. Shares of PepsiCo trade for a price-to-earnings ratio of 23.3, based on trailing earnings. The stock is not cheap, but it could be modestly valued. Shares trade at a slight discount to the S&P 500 Index.
PepsiCo could increase earnings-per-share at a high single-digit rate each year. In addition to a nearly 3% dividend yield, it is not unreasonable to expect total returns of 10% annually, or more.
The five on this list have strong brands, and see steady demand each year, even during recessions. This should help them continue raising dividends each year.
Dividend growth investors should consider including food and beverage stocks within an income-focused portfolio.