Consumer Staples Select Index sales, earnings, and dividends have grown at a CAGR[1. Compound annual growth rate] of 2.3%, 2.9%, and 7.4%, respectively, between 2012 and 2017. Potential hikes in interest rates might render the sector vulnerable.
Universal Corp. (UVV) has recorded negative revenue growth in last three years. This performance took a toll on EPS[2. Earnings per share] growth too. Operating income fell in fiscal 2015 and 2017. Increased health awareness is a big reason for consumers to shun tobacco in all its forms.
The tobacco manufacturer has generated enough free cash flow in the last three years to support its dividend obligations. It has also maintained a good cash balance. Universal Corp. also has a low debt ratio, even lower than Reynolds American (RAI). The stock price has fallen 0.4% on a YTD[3. Year-to-date] basis.
Universal Corp’s PE[4. Price-to-earnings ratio] of 72.2x compares to a sector average of 32.3x. Its dividend yield of 3.4% compares to a sector average of 4.4%. Reynolds American offers a dividend yield of 3.2% at a PE of 15.2x. Universal Corp.’s dividend payout ratio has dipped from 68.5% in fiscal 2016 to 48.7% in 2017. Reynolds American had a dividend yield of 44% in fiscal 2016.
Archer Daniels Midland
Archer Daniels Midland (ADM) recorded a decline in revenue in the last three years, driven by unstable commodity prices, intense competition, and a strong US dollar. This performance led to a decline in operating income and EPS in the last two years. The company has always generated enough free cash flow to pay off its dividends, barring fiscal 2016. It has also maintained a good cash position. It has a low debt ratio. Its stock price has dipped 9.7% on a YTD basis.
Archer Daniels Midland’s PE of 19.1x compares to a sector average of 23.5x. Its dividend yield of 3.1% compares to a sector average of 2.3%. Kraft Heinz (KHC) offers a dividend yield of 2.9% at a PE of 29.5x.
Archer Daniels Midland had a dividend payout ratio of 45% in fiscal 2016 compared to Kraft Heinz at 112.5%, the latter’s first dividend payment.