On a market-cap-weighted basis, the household products industry’s profit growth in 2015 is expected to be 0.7%, below its own five-year average of 1.8% as well as the estimated profit growth of 1.5% for the consumer staples sector, due to rising foreign currency exchange pressures and slowing international growth. However, S&P Capital IQ thinks a high dividend yield (2.8% for household products industry vs. 2.6% for consumer staples and 2.0% for the S&P 500 Index) may be attractive to income-oriented investors.
S&P Capital IQ thinks recent restructuring efforts and a greater focus on productivity and efficiency improvements should support margin expansion for the household product industry over the next few years.
Procter & Gamble (PG) is the largest company in the industry, with a market cap of more than $200 billion. However, due to significant exposure to Europe, Asia, Latin America and other non-North American markets (61% of FY 14 revenues), the strength in the US dollar is a headwind. Due to an estimated negative 5% foreign currency exchange impact, we estimate FY 15 (Jun.) sales will decline 3.5%. Organically, excluding currency, acquisitions, and divestitures, the company will likely post sales growth of 2%, according to S&P Capital IQ’s estimates, driven by pricing increases and slight unit volume growth in core brands.
PG sports a 3.1% dividend and its $2.57 payout is just 63% the S&P Capital IQ FY 15 estimate of $4.09. The company has an above-average S&P Capital IQ Quality Ranking of A+ for its consistent earnings and dividend record.
Another dividend paying household products company is Kimberly Clark (KMB), a $39 billion market cap company. KMB has a 3.3% yield and pays of 62% of its 2015 projected earnings as dividends. The company has an above-average S&P Capital IQ Quality Ranking of A.
As my colleague Sam Stovall recently noted, stocks in the S&P 500 with Above Average quality rankings have an average beta of 0.9, compared with the average beta of 1.3 for those ranked Below Average and 1.0 for those ranked Average. http://www.spcapitaliq.com/insights/a-quest-for-quality
In 2015, S&P Capital IQ looks for KMB’s sales to decline 4.5%, reflecting organic sales growth of 4% and a negative foreign currency exchange impact of about 8.5%. Organic sales growth is expected to be driven mostly by higher volumes, with about 1% improvement in pricing and product mix.
In a low sales growth environment, household products companies are likely to simplify operations by focusing on core assets that either carry the highest sales growth potential or generate significant cash flow due to wide margins. One significant recent asset action included KMB’s November 2014 spin-off of its health care business Halyard Health. Meanwhile, in November 2014, PG agreed to sell its Duracell business to Berkshire Hathaway, pending necessary approvals, in exchange for $4.7 billion in PG shares held by Berkshire.
Investors have increasingly been using ETFs in a tactical manner to gain exposure to industries, while benefiting from their low-cost, passive nature and the ability to make intra-day trades. However, exposure to the household products industry as well as cost factors and the dividend yields is different for various ETFs, which is why investors should look inside before considering investing.
S&P Capital IQ has research and rankings on various consumer staples stocks and ETFs. Visit http://trymsatoday.com/ to learn more and to read the full article.
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