The consumer staples sector is home to some of the world’s most well-known dividend growth stocks. For example, consumer staples have the most Dividend Aristocrats of any individual market sector.

Consumer staples also appeal to risk-averse investors as defensive industries such as food and beverage and personal care products see steady demand, even during recessions.

According to our current expected return estimates, the following three stocks are the top consumer staples stocks.

Our 3 Favorite Consumers Staples Stocks

Walgreens Boots Alliance (WBA)

Walgreens Boots Alliance is the biggest retail pharmacy in the United States and Europe. Through its flagship Walgreens stores and other business ventures, the company has locations in more than nine countries, employs more than 315,000 people, and has over 13,000 stores in the U.S., Europe, and Latin America. 

On March 28th, 2023, Walgreens reported mixed results for the second quarter of fiscal 2023. Sales grew 3%, but adjusted earnings-per-share plunged (-27%) over the prior year’s quarter, from $1.59 to $1.16, primarily due to high COVID-19 vaccinations in the preceding year’s period. Earnings per share beat analysts’ consensus estimates by $0.05. The company has beaten analysts’ predictions for 11 consecutive quarters. 

However, as the pandemic has faded, Walgreens Boots faces tough comparisons. It reaffirmed its guidance for earnings-per-share of $4.45-$4.65 in fiscal 2023, implying a (-10%) decrease at the mid-point.

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Source: Portfolio Insight

Growth and Valuation

Walgreens has grown its average earnings-per-share by 7.6% per year over the last decade. This increase was driven by a combination of factors, including solid top-line growth from $72 billion to $133 billion, a steady net profit margin, and a reduced number of outstanding shares. But earnings-per-share fell off dramatically in recent years as the COVID-19 pandemic has subsided. Vaccinations and healthcare products drove strong growth, but these tailwinds have leveled off.

Over the long term, an aging population and focusing on becoming a health destination should provide renewed growth. We expect Walgreens to grow its earnings-per-share by 4.0% per year on average beyond this year. In addition, the stock looks undervalued with a 2023 P/E of 7X, compared with our fair value estimate of 10X. 

Walgreens is a Dividend Aristocrat with a current yield of 6%. Total expected returns are estimated at 15.8% due to a combination of EPS growth, dividends, and a rising P/E multiple.

Related Articles: Walgreens Boots Alliance (WBA) – An Undervalued Dividend Aristocrat

Target Corporation (TGT)

Target is a discount retailer based in the U.S. Its business consists of about 1,850 big box stores, offering general merchandise and food and serving as distribution points for its burgeoning e-commerce business. It is our second pick for consumer staples stocks.

Target posted first-quarter earnings on May 17th, 2023, and results were better than expected for the top and bottom lines. Adjusted earnings-per-share came to $2.05, 29 cents better than expected. Revenue was up fractionally year-over-year to $25.3 billion, beating estimates by $40 million.

Traffic was up 0.9% year-over-year, down from 3.9% in the same period a year ago. Comparable sales were up 0.7%, offset by a decline in digital sales, so the company missed estimates of growth of 1.1%. Adjusted EBITDA reached $2.02 billion, much better than the $1.81 billion expected. 

Target noted it reduced inventory by 16% year-over-year as the company bought less in order to reduce promotional activity. The first quarter gross margin was 26.3% of revenue, up from 25.7% a year ago.

Growth and Valuation

Guidance for the year was unchanged at $7.75 to $8.85 in adjusted earnings-per-share. Target has grown its earnings-per-share at an average annual rate of nearly 13% during the last decade. 

Accelerated sales growth, thanks mainly to the company’s digital expansion, has fueled its earnings growth and will continue to do so. The company also aggressively repurchases shares which boosts EPS growth. The company has reduced its share count by about (-4.8%) per year in the last six years. We see continued comparable sales growth as driving results, along with sizable margin expansion from low levels in 2022 and 2023 and a tailwind from the buyback.

Target has grown its dividend for more than five decades, making it a Dividend King. The company is investing heavily in its business to navigate the changing landscape in the retail sector. The payout ratio is now 52%, which indicates a safe dividend. The stock has a 3.3% dividend yield.

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Source: Portfolio Insight

British American Tobacco (BTI)

British American Tobacco is one of the world’s largest tobacco companies and our third favorite of the consumer staples stocks. The firm owns many well-known tobacco brands, including Kool, Benson & Hedges, Dunhill, Kent, and Lucky Strike. The company also purchased the remaining 48% stake in Reynolds American Tobacco, which it did not own, in July 2017. 

British American Tobacco generated 8% group-wide revenue growth during fiscal 2022. This revenue growth was driven, among other factors, by a strong performance of the non-combustible product portfolio the company has been investing heavily in, which now generates 11% of the company’s overall revenue and which has grown at a rate of 41% over the last year. British American Tobacco had adjusted earnings-per-share growth of 13% during the period, which was quite attractive. However, the weakening Pound Sterling negatively impacted British American Tobacco’s results once denominated in U.S. Dollars. 

Growth and Valuation

For the current fiscal year, British American Tobacco expects its revenue to grow by 3% to 5% at constant currency rates, driven mainly by its New Categories business growth. Earnings-per-share are forecasted to grow by around 5% at constant currency rates. 

This steady growth allows the company to maintain its high dividend payout, yielding over 8%. British American Tobacco has kept its dividend payout ratio at 55% – 75% throughout the last decade. We believe that thus UK Dividend Aristocrat’s dividend is safe for the foreseeable future. In addition, shares appear undervalued, with a 2023 P/E of 8X, which is just below our fair value estimate of 9X. Total returns are estimated at 14.2% annually over the next five years.

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Source: Portfolio Insight

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