When the stock market gets dicey, focus on companies that make basic everyday products like toothpaste, toilet paper, razor blades and baby food. Consumers buy them no matter what the economy’s doing.
So goes an old investing adage, and indeed it usually holds true.
But what about in this historically volatile market? It’s better to study the numbers than make an assumption.
Q: Are consumer staples stocks still a wise investment or do they face the same issues as other stocks?
A: These companies — which manufacture and sell household products, food and beverages, prescription drugs and tobacco — will feel the effects of any economic slowdown but are likely to absorb them more easily.
Consumer staples stocks are the only sector in the Standard & Poor’s 500 index to have gained in price, 6.6 percent, since the all-time market peak in October 2007. And their defensive nature has held up well in the recent volatility. Through Tuesday, they’d lost only 5.2 percent since July 22 when the market slide began in earnest. By contrast, the S&P 500 was down 11.3 percent.
Along with utilities, consumer staples also have been less volatile than any other sector over the last five years with a beta (a measure of stocks’ volatility) of about .6. That means their price swings are only about 60 percent as much as the overall market’s.
With high cash flow and above-average dividends, the big consumer products companies with rock-solid brands — think Procter & Gamble, Coca-Cola, Philip Morris — are “the established, safe and sane plays,” says Mitch Schlesinger, chief investment officer at FBB Capital Partners in Bethesda, Md. They should be relatively immune to reductions in government spending, and they make sense for the long term.
A couple of cautionary notes bear keeping in mind, however.
If unemployment doesn’t improve and the economy remains sluggish, consumers will have less money to spend on soft drinks and cigarettes and might even go generic rather than buying Coke and Crest.
And consumer staples are more expensive than other stocks right now.
Their cost as tallied by the price-earnings ratio — a measure that shows investors how much they’re paying for a dollar in earnings — is 14.3 times earnings for the past year. That’s more than $2 a share above the S&P 500 as a whole and higher than every other sector but telecommunication services (16). So you’re paying a bit for the safety; it’s already reflected in the price.
Two exchange-traded funds offer investors a good way into this sector. The Consumer Staples Select Sector SPDR (XLP) invests in 41 leading U.S. companies that are in the S&P 500. And iShares S&P Global Consumer Staples (KXI) adds overseas exposure, with about half the companies consisting of international giants such as Danone, Diageo, Nestle and Unilever.
Personal Finance Writer Dave Carpenter can be reached at http://twitter.com/scribblerdave.