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The Procter & Gamble Company (PG), Walgreen Company (WAG), Wal-Mart Stores, Inc. (WMT): Are Blue-Chip Consumer Staples Worth Today’s Premium Valuations?

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Introduction to the Consumer Staples Sector

The Consumer Staples sector consists of companies that provide essential products.  In other words, Consumer Staples are products that people cannot or are unwilling to do without.  As a result of the essential nature of Consumer Staples, there are several attributes that distinguish this sector from most others.  First of all, the essential nature of the products that Consumer Staples’ companies produce, are for the most part, non-cyclical.  Second, Consumer Staples tend to be very insensitive to economic cycles.  Therefore, their businesses tend to remain strong and healthy even during recessions.

Because of the stability and consistency that many Consumer Staple companies possess, you will find many of the bluest of blue-chip companies within this sector.  However, finding these blue-chips at attractive valuations is often difficult or rare.  The best-of-breed Consumer Staples companies often command quality premiums relative to companies in other sectors with equivalent fundamental attributes.  To state this more simply, moderate overvaluation relative to intrinsic value based on cash flows and earnings is very common for companies in this sector.

The Procter & Gamble Company (NYSE:PG)

Since I am such a stickler for valuation, I am not willing to pay more for even the best company than I believe it is worth, based on fundamental values.  Consequently, several of the best-of-breed Consumer Staples companies were cut from my list based solely on valuation.  To be clear, many of these stocks are currently trading at historical normal valuations, but above what I would consider to be their intrinsic value.  Since this moderate overvaluation tends to be the norm with these companies rather than the exception, some prospective investors might be willing to pay the premiums for many of these names, but not me.

The dividend stalwarts that I’ve excluded based on what I’ve stated above are listed in alphabetical order as follows:  Colgate-Palmolive Company (NYSE:CL), The Clorox Company (NYSE:CLX), Campbell Soup Company (NYSE:CPB), Flowers Foods, Inc. (NYSE:FLO), General Mills, Inc. (NYSE:GIS), Kimberly Clark Corp (NYSE:KMB), The Coca-Cola Company (NYSE:KO), PepsiCo, Inc. (NYSE:PEP), The Procter & Gamble Company (NYSE:PG), Reynolds American, Inc. (NYSE:RAI), The J.M. Smucker Company (NYSE:SJM), SYSCO Corporation (NYSE:SYY), Unilever plc (ADR) (NYSE:UL) and Unilever N.V. (ADR) (NYSE:UN).

To be clear, most of the names cited above are currently trading at historically normal premium valuations.  Consequently, I consider them overvalued, and therefore, they were excluded.  Another interpretation can simply be that these are quality blue-chips worthy of the premium valuations that the market is currently awarding their shares.  In other words, all of the names cited above could be included as retirement portfolio candidates for the prudent dividend growth investor willing to pay a premium price for quality.

The Procter & Gamble Company (NYSE:PG):  A Classic Example of Premium Valuation

The following earnings and price coerelated graph on The Procter & Gamble Company (NYSE:PG) illustrates how the market tends to price this blue-chip at a premium.  The orange line on the graph represents an fair value earnings justified PE ratio of 15, and the dark blue line represents the historical normal PE ratio of 19.5 that the market has typically valued Procter & Gamble at.

Furthermore, we see that the Great Recession of 2008 did bring The Procter & Gamble Company (NYSE:PG)’s price down to its earnings justified level and stayed there through much of 2012.  However, with the bull run in 2013, Procter & Gamble’s share price has now returned to its historical normal PE ratio.  Consequently, it could be argued that buying Procter & Gamble today at its historical normal PE makes a certain amount of sense.  Even though the price was adjusted downward during the recession, it has since moved back into alignment with its historical normal value.  However, I have never been able to make myself pay more for a company than I believe it is worth.  For disclosure, I bought The Procter & Gamble Company (NYSE:PG) after it reverted to the mean, and still hold it currently.

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