One of the defensive investment strategies I began writing about last summer involves switching equity positions from the distributors of food -- grocery stores -- to the producers of packaged foods sold by the grocers.
Since I last discussed the issue in October, the grocery store industry has gone through a reshuffling, with Safeway being taken private by Cerberus Capital Management and many of its stores being sold to other grocers in order to meet U.S. Federal Trade Commission requirements.
Until that happened, Safeway was the second largest grocer in the country, behind Kroger (KR), so this was quite a shakeup for the industry. The grocery industry has been undergoing increased privatization, with Cerberus being the dominant buyer for the past decade.
The end result is that there has been a reduction in the size of the industry that is publicly traded. This has been beneficial to those food distributors that are still publicly traded and helped to increase investor interest in other companies in the space.
Those benefiting include Whole Foods (WFM), Supervalu (SVU), Fresh Market (TFM) and Wal-Mart (WMT). Since I last wrote about the sector five months ago, Kroger's stock has increased 31%, Whole Foods has advanced 48%, SUPERVALU is up 16%, Fresh Market has gained 8%, and Wal-Mart is up 7%.
The food producers have not performed as well, but only Coca-Cola (KO) is negative over that period with a return of -3%. PepsiCo (PEP) is up 5%, Unilever (UL) 9%, General Mills (GIS) 6%, Kellogg (K) 7%, Danone (DANOY) 6% and Mondelez (MDLZ) about 7.5%.
My original premise in suggesting a shift to the producers from the distributors was that the equity value of the distributors had been bid up by last summer, with no corresponding increase in dividends paid. In that regard, the distributors didn't make sense as income vehicles, which is traditionally why investors have owned these stocks.
That trend has continued over the past six months, with a large gap in dividends paid developing between the two groups. Kroger's dividend yield has now declined to 1%, Whole Foods' is at 0.9%, while Fresh Market and Supervalu do not pay a dividend. The only one with a dividend yield closer to the producers is Wal-Mart at 2.6%.
By comparison, the producers are still paying excellent dividends, with yields from Coca-Cola, Unilever, Kellogg, and General Mills at 3%, PepsiCo at 2.6% and Mondelez at 1.6%. The only one without a dividend is Danone.
The only logical reason for the grocers continuing to outperform on a capital appreciation basis is the reduction in aggregate shares available, as the industry steadily being privatized has made it more attractive to growth than income investors. This makes sense because the largest publicly traded grocers, with the exception of Wal-Mart, have roughly one-tenth the market capitalization of the largest producers.
The bottom line is that the shift by income-seeking investors away from the grocers and in preference for the producers or some other vehicle is likely already completed.
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