With only 1% of my portfolio in the consumer staples (AKA consumer defensive) sector through some broad market index ETFs, I’ve been on the hunt for some individual stocks to add. Ideally, I’d like consumer staple stocks to make up about 15-20% of the portfolio.
As you can see I’ve got some work to do, which is why I recently wrote From 33 To 3: Dividend Growth Consumer Staples To Consider on Seeking Alpha. In this US-focused article, I canvassed the US Dividend Champions list for companies with a dividend streak of 10 or more years and applied some other dividend and quality metrics to the 33 consumer staple stocks. I was surprised to see that I was left with only three companies: Proctor & Gamble (PG), Pepsico (PEP), and Clorox (CLX). I encourage you to check out the article as there were some surprising names that didn’t make the cut. Or if you just want the spreadsheet I’ve made it available here.
After going through this process, I realized that PG and PEP are close (10-15% off) to a price I’d consider investing at. I thought it would be interesting to apply a similar dividend screen to the Canadian market in an effort to find some additional candidates. I used the following requirements:
- Used the Feb 28, 2018 version of the Canadian Dividend All-Star List to filter all consumer staples stocks with a dividend streak of 5 or more years.
- A reasonably high dividend yield of 3.8% or higher (Roughly 1.5 times the TSX yield).
- Estimated future dividend growth of 6% or more. I used ValueLine’s estimated annual dividend growth rates for the next 3-5 years for my estimates. Where ValueLine wasn’t available I used Thomson Reuter’s (TR) analyst estimates which forecast to Fiscal Year (FY) 2019 or FY 2020.
- A reasonable payout ratio of 60% or less based on the next 12 months EPS estimates (Dividend / N12 EPS).
- Value Line financial strength of B++ or better.
- S&P credit rating of BBB+ or higher. Where S&P wasn’t available I used Moody’s credit rating of Baa1 or higher, or DBRS credit rating of BBB (high) or higher. If no credit rating was available I required the most recent quarter (MRQ) long-term (LT) debt to equity ratio to be 0.5 or less AND the trailing twelve months (TTM) interest coverage ratio to be 4.0 or higher. I used MorningStar for the MRQ LT Debt/Equity and TTM Interest Coverage ratios.
- MorningStar moat rating of narrow or wide.
Before I get into the results I think it’s important to understand that Canada isn’t known for its consumer staples. Most investors think of financials (The big banks) and the energy sector when they invest in Canada. In fact, if you take a look at the S&P/TSX Composite index you’ll find that these two sectors make up over half of the index, and consumer staples were only 3.7% (As of Feb 28, 2018)!
OK, now that I’ve tipped my hand a bit…
How many of the 14 consumer staple stocks in the Canadian Dividend All-Star List do you think passed? (FYI – The full table is at the end of this article).
If you guessed zero, nada, nil, zip or zilch you were right!
I wasn’t too surprised by this result as Canada isn’t known for its consumer staples and a lot of the companies are on the smaller side so MorningStar moat information wasn’t available for most of these companies.
Digging Deeper & Ignoring the Minimum Dividend Yield
If you remove the minimum dividend yield requirement of 3.8% then there is one company that passes: Saputo Inc. (SAP.TO). There were also two other low yielding companies that didn’t have moat ratings by MorningStar, but passed the other requirements: Jean Coutu Group (PJC.A.TO) and Lassonde Industries Inc. (LAS.A.TO).
Saputo is one of the top ten dairy processors in the world. They produce, market, and distribute dairy products like cheese, fluid milk, extended shelf-life milk and cream products, cultured products and dairy ingredients. Some of their more well-known brand are Saputo, Alexis de Portneuf, Armstrong, COON, Cracker Barrel, Dairyland, DairyStar, Friendship Dairies, Frigo Cheese Heads, La Paulina, Milk2Go/Lait’s Go, Neilson, Nutrilait, Scotsburn, Stella, Sungold, Treasure Cave and Woolwich Dairy.
The company has raised their dividend for 18 years in a row and has strong 5 and 10-year average dividend growth rates of 14.5% and 13.2%. ValueLine is estimating 9.5% dividend growth in the next 3-5 years which is more in line with more recent dividend increases, which for the past few years have been around the 7-9% range.
There are two issues that prevent me from investing right now: valuation and the low dividend yield of 1.56%. I will consider investing in low yield high dividend growth stocks, but I’m usually looking for at least 2.5% to start and will sometimes go as low as 2%. Saputo’s stock price currently (March 22, 2018) sits at a little over $41 and would have to drop to $25.60 before hitting the 2.5% dividend yield. MorningStar has a fair value price of $32 for Saputo, which they are currently trading almost 30% above. While I consider Saputo a decent dividend growth stock, the price needs to come down before I’d consider investing. If it starts to get closer to the 2.5% dividend yield I’ll evaluate a good entry point at that time.
What’s your take on Saputo?
Jean Coutu Group
Jean Coutu Group is currently in the process of being acquired by another consumer staple in the list: Metro Inc. (MRU.TO). Since they are being acquired I’m not going to go into this stock much. Metro didn’t pass because of a low dividend yield of 1.77%, a BBB credit rating and no moat.
One interesting tidbit is that Jean Coutu is one of a few Canadian dividend growth companies that doesn’t have any long-term debt. Corby Spirit and Wine Ltd (CSW.A.TO) is another consumer staple with no long-term debt, but it has a high payout ratio.
Related article: 8 Canadian Dividend Growth Stocks With No Long Term Debt
Lassonde Industries Inc.
Lassonde develops, produces and markets fruit and vegetable juices and drinks. They are another low yielding company with a dividend yield of 0.96% and have a dividend streak of 10 years. 5 and 10-year dividend growth rates are 13.7% and 16.0%. ValueLine doesn’t have a dividend growth estimate, but Thomson Reuters had analyst’s estimating annual dividend growth of more than 10% to fiscal 2020. Considering the low payout ratio, I think this is more than a reasonable estimate. Their last dividend increase was in May 2017 when they increased the quarterly dividend 19.6% from $0.51 to $0.61. While I expect another hefty increase from them announced in May 2018 I won’t be investing. The dividend yield is just too low.
What’s your take on Lassonde? MorningStar doesn’t have a moat rating for them, would you consider the company to have some sort of sustainable competitive advantage?
Here is the full table of all 14 companies. For those excel nerds like myself, you can get the spreadsheet here.
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