Yes, the stocks of Procter & Gamble (PG) and Kimberly-Clark (KMB) and some of the other household names that have just reported are intriguing here for those who seek income. Truly, their fabulous dividend growth and consistent, albeit low growth strategies will continue to work well over time, as they always have.
But there are really important issues surfacing here that haven't been in front of investors for ages, issues of relevance, capital returns and rotations that are roiling the group and shocking the way we think of companies that make household goods.
Now, I like that the stocks of what we call the "CPG" group -- consumer packaged goods -- are lower than they would be in the old days of the last eight years, mostly because big portfolio managers like cyclical growth that fueled by a global expansion. The hedge fund virtual playbook says stay away from these stocks at all costs.
These managers want the growth that's easier to find in tractors and aerospace assembly lines, than it is in sales of bottles of shampoo or packages of diapers or tissues.
Some fear that if you buy these stocks now, their dividends will not be enough "protection" against rising rates. Others say, if the economy continues to get stronger, who needs these stocks? If you were trying to sell the stocks in this cohort to a big pension fund, I think they would ask what I heard on the Kimberly Clark conference call. That was, basically, "you've got good gross domestic product growth and good income growth worldwide, a lower dollar and some inflation, which should lead to better pricing, and all you can give us is one percent growth? Are you kidding?"
All valid objections.
But the fact remains that none of these stocks has lost their bond market equivalent status, and I think if you find the ones with the right balance of capital allocation toward buybacks, growth and dividends, you will do darned well over a multi-year period through dividend reinvestment.
It's a terrific long-term strategy for those recognizing that their longevity doesn't allow them to cash out and buy much lower yielding, albeit safer bonds.
But how come I can't pound the table on these stocks altogether for everyone?
Several reasons.
First, their growth is as constrained now from online purveyors -- think Amazon (AMZN) -- as was apparel and books before them.
Second, millennials are price-conscious buyers, and they seek price where they can get it: clubs, Walmart WMT, dollar stores, online.
Third, the companies seem to spend an awful lot of time waiting for birth rates to come back. Boeing (BA) or Caterpillar (CAT) or Action Alerts PLUS charity portfolio holding Illinois Tool Works (ITW) are not similarly worried.
Fourth, no matter how strongly I believe that their yields will go higher from dividend boost more than from stock declines, these will remain out of favor in a tightening cycle that will be much more beneficial for, say, the financials.
Fifth, they are not innovating like, say, the health care stocks are, and they are not harnessing as much tech as I would like to see them take share.
So then what is the point of even addressing a stock like Procter & Gamble or Kimberley Clark or Colgate CL, or any of these other consumer packaged goods companies? I think it is simple: if you stay diversified, which we know is important, if you want sustainable income, a consistent plus for any portfolio, then you must examine these stocks.
Let's take the Procter situation. I think that company recognizes the challenges of the new outlets, the new distribution methods and the need to be even more price competitive.
But at the same time, it takes rewarding shareholders more importantly than just about any company on earth. I think that it now recognizes that there has to be a far more radical cost take-out if it can grow that cash flow and keep rewarding individuals with ever-higher dividends, even as it didn't lay out a post-tax change regime book of positive particulars as so many have.
The addition of Nelson Peltz to the board I think will end up producing a stretch of far greater margin improvement than imaginable, perhaps on the same order of what happened at Mondelez (MDLZ) , another board he served on successfully.
In other words, while I would not recommend any of the stocks in this cohort to those who seek pure capital appreciation -- the contest is too difficult right now -- I would endorse buying Procter for the changes it will soon make to take more control of its cost destiny while it seeks to tame the new channels that still favor big household brands over the niche -- right in PG's sweet-spot.
In other words, know thyself. You want income more than growth? You want steady dividend increases. I heard nothing yesterday that dissuaded me from thinking you shouldn't buy either Kimberly or Procter, and the latter seems ripe for positive long-term change by a board re-energized by the challenge of an outsider helping to drive long-term value.
