Sunday, September 6

Week 218 - Food Consumer Products

Situation: This week’s blog is the second of a 4-part series covering companies in food-related categories on the 2015 Fortune 500 List, which has been expanded in recent years to include the 1000 largest US companies by revenue. The first installment (see Week 210) explained the methodology and looked at “agronomy and food production companies.” With the exception of Tyson Foods, the products of those companies are rarely seen on grocery store shelves. This week, we confine our attention to companies whose sole purpose is to put food and beverages on grocery store and convenience store shelves. Fortune 500 calls these "food consumer products" companies.

Mission: Identify stocks of “food consumer products” that might be suitable for inclusion in a retirement portfolio.

Execution: To start, we identified the Fortune 500 “food and consumer products” companies that also appear on the Barron’s 500 Lists for 2014 and 2015. Those rank the 500 largest companies traded on the Toronto and New York stock exchanges by revenue. Rankings “compare companies on the basis of three equally weighted measures: (1) median three-year cash-flow-based return on investment; (2) the one-year change in that measure, relative to the three-year median; (3) sales growth in the latest fiscal year.” Companies without trading records going back to the S&P 500 Index peak on 9/1/2000 have been excluded. There are 11 matches, 6 of which are companies that have increased their dividend annually for at least the past 10 yrs (see Column S in the Table). Four of those “Dividend Achievers” are suitable candidates for inclusion in your retirement portfolio, based on a) having lost less than our key benchmark (VBINX) during the Lehman Panic, b) beating the S&P 500 Index over the past 16 yrs and carrying less statistical risk of loss in a future “bear market” per the BMW Method, and c) having an S&P Bond Rating no lower than BBB+ and an S&P Stock Rating no lower than B+/M. Those 4 are Hormel Foods (HRL), General Mills (GIS), PepsiCo (PEP), and Coca-Cola (KO).

Bottom Line: We’re looking for stocks that perform well during good times and bad. That comes down to looking for companies with strong brands and pricing power. One of the best ways for a company to have pricing power is for its goods to enjoy “inelastic demand.” In other words, there is steady demand regardless of fluctuations in the economy; sales volume “changes little with a large movement in price”. Nothing does that better than food, even though the key input for food production is a raw commodity like wheat or rice, where spot prices can change dramatically. But food processors are able to pass any increased costs on to the consumer because food is a necessity that will be purchased regardless of price increases. In the accompanying Table, we have 11 companies for you to consider.

Risk Rating: 4

Full Disclosure: I have stock in HRL, GIS, PEP, and KO.

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