Next on the countdown following our sectors article, and our Top 5 Tech Stocks we analyse the Consumer Staples sector a bit more and try and identify our top five stocks to watch in the sector in 2024.
Again – like utilities – these stocks are more of a ‘need’ rather than a ‘want’. They are overwhelmingly defensive, show less volatility in a recessionary climate, rather than growth stocks, and often pay out a consistent stream of dividends, which can create an income portfolio for investors looking to gain more than just capital returns from their investments.
- IPO Radar: WeRide, Pick n Pay, Arabian Mills, BRB Foods
- Anglo-Eastern Plantations: Are shares of this palm oil grower fairly priced?
- What are the UK’s top consumer staples shares in Q3?
The demand for Consumer Staples is relatively inelastic, meaning that consumers are less likely to reduce their purchases of these goods during economic downturns. This is because these goods are considered to be essential for daily life, and people are willing to cut back on other expenses in order to afford them. Food manufacturers form a large chunk of the sector, and as the last year has shown us, consumers don’t really have much of an option even when their budget is being stretched by rising food prices. You might in the current climate think twice about buying a Rolex, but you still have to buy bread, milk and toilet roll every few days, regardless the cost.
The brand loyalty that some products inspire (due to clever marketing and paid-for product placement in retail outlets) also buoys Consumer Staples companies with consumers choosing to buy can of Heinz Baked Beans, even if there are cheaper alternatives available. This loyalty can provide protection against competitive pressures, even during economic downturns.
Many Consumer Staples companies have diversified product portfolios, which can help to reduce their reliance on any one product or market. This diversification can make their businesses more resilient to economic shocks and the nature of trade (and multinational nature of many of these businesses) mean that Consumer Staples companies have a global reach, which can help them to mitigate the impact of economic downturns in any one particular market. This global presence can also provide them with access to new markets and growth opportunities.
We will be watching these five stocks in 2024.
1. Tesco LON:TSCO
Tesco is the largest grocery retailer in the UK, with a market share of over 30%. The company is well-positioned to benefit from the growing demand for groceries, as well as the increasing popularity of online grocery shopping. Tesco is also expanding its product range into non-food categories, such as clothing and electronics.
The ubiquitous supermarket, Tesco possesses a strong brand portfolio and its shares have put on around 30% in 2023 as the retailer has seen bumper revenues. Albeit, the company has attracted a bit of shade from civil society for what the unions argue has been “rampant profiteering” from the cost-of-living crisis, but investors haven’t been complaining, as Tesco also pays a healthy dividend, currently yielding just under 4% above the FTSE 100 average and since October 2021, the grocery retailer has purchased over GBP1.5bn of its own stock. Tesco is the golden corporate gift that keeps on giving without end.
Its dominance in the UK has meant that it has managed to keep its costs controlled and negotiate hard with suppliers. Offering a wide range of groceries, spanning fresh produce, packaged food, household supplies, and non-food items like clothing and electronics. This breadth of products caters to a broader customer base and increases the company’s resilience during economic downturns.
Tesco strategically emphasizes convenience, operating a large network of stores, including express and convenience formats. This focus aligns with growing consumer preferences for quick and easy shopping experiences. But it is also making inroads online, investing in online grocery shopping, mobile payment options, and data analytics. This digital focus enhances customer convenience, improves operational efficiency, and opens up new revenue streams.
The UK grocery market is expected to continue expanding due to population growth and rising disposable incomes. This growth presents an opportunity for Tesco to capture a larger share of the market and the retailer is well-positioned for long-term growth. The company’s strong brand portfolio, market dominance, diversified product range, and strategic focus on convenience provide a solid foundation for sustained success.
2. Unilever LON:ULVR
Unilever’s share performance hasn’t been as strong as Tesco’s, in fact it has fallen 9% over one-year, but Unilever is one of our picks due to the vast number of brands, including Hellman’s, Magnum, Knorr and Domestos.
The City still loves the company, with Barclays recently upgrading Unilever to ‘Overweight’ targeting a price of 4,600p. The broker said: “Unilever is now talking about brand superiority across every vector, not just technical superiority which is what it was anchored on before. Consumers care about every aspect of brand, not just whether the technical efficacy is superior to the competition…Unilever is also now talking about really differentiated R&D and consumer insight that can be scaled, which drives category growth not just ‘stealing share’. Obviously, saying this and doing it consistently are two different things but we were encouraged by the clarity on this crucial point.”
It has an international presence, operating across over 190 countries, with a diverse geographical footprint. This global presence ensures a diversified revenue stream and mitigates the risks associated with any one market. The company’s international presence also allows it to tap into growing consumer markets and expand its brand reach. It is particularly targeting developed nations with its brands and sees great growth potential.
The sheer diversity of brands, encompassing food, beverages, home care, and personal care products enables the company to appeal to a broad customer base and address diverse consumer needs, reducing reliance on any one product segment. Steady, but not spectacular, with the share’s recent dip, now might be a time to rush in and grab a bargain.
3. Associated British Foods LON:ABF
Another pick from the top drawer is FTSE100-listed Associated British Foods LON:ABF. Again 2023’s share price hasn’t dazzled, being range-bound for most of the year around 1,900p and 2,000p, but following solid full-year numbers, shot up to break 2,400p earlier this month, giving a one-year return of nearly 50%, but we reckon it is still undervalued at this price and could offer more in 2024.
ABF produces a wide range of products, including sugar, flour, and baked goods a strong market position in these segments, which gives it a competitive advantage. The company is well-positioned with operations in over 40 countries to benefit from the growing demand for its products, especially in emerging markets.
The company also owns high-street fast fashion retailer, Primark, which has been a standout performer for ABF. In its finals, ABF declared a final dividend of 33.1p/share, up from 29.9p the year before, as well as a 12.7p special dividend. These brought the total financial 2023 payout to 60p per share, up 37% from 43.7p.
Again, it’s not often that the chance to buy a FTSE100 stalwart at a bargain comes along – it would have been a coup to buy in January 2023, but buying in January 2024 also offers value.
4. Tate & Lyle LON:TATE
Moving down to the middle-order, a stock The Armchair Trader liked earlier this year was sugar producer, Tate & Lyle LON:TATE. We’re still keen on this Consumer Staple. Tate & Lyle is a leading producer of high-quality sugar and sweeteners, as well as a range of other food ingredients, such as starches, fibres, and functional ingredients and has operations in over 130 countries.
Another defensive stock but has been an innovator for over 160 years consistently developing new products and applications for its sugar and sweeteners, as well as expanding into new food ingredients markets.
It’s been a mixed year for the FTSE250-listed company. Concerns about volumes – which declined through the year – and pricing have weighed down its shares, which fell around 10% over 2023. Currently (14th December) sitting at around 650p the shares are about where they were two years ago. However, over that period, in May they were at 837.5p, which makes broker, Jeffries’ 800p target, a 25% uplift, not inconceivable.
The company doesn’t just do sugar, which has attracted the ire of obesity-focussed regulators in Europe and North America, but also is innovating ‘healthy’, no-calorie sweeteners and other food ingredients.
This is a ‘Buy and Hold’ stock that could offer some sugar in your portfolio in the coming year.
5. Bakkavor LON:BAKK
Another mid-cap pick is Bakkavor LON:BAKK, which originated in Iceland as a cod-roe processing company and expanded into fresh food production. The company produces a range of meals, salads, desserts, dips, sauces, sandwiches and pizza and bread products, with over 3,200 product lines to over 900 supplies in the UK, USA and China.
The FTSE250-listed food producer operates 23 factories in the UK, including nine in the US and five in China. Although the share price has been somewhat muted, down around 11% on the year, it is another defensive pick and it’s market segment – fresh foods – fits in well with our ‘busy, but still need something nutritious and healthy to grab on-the-go’ lifestyles.
The company has had a tough few years, as have many food producers, but Bakkavor has undertaken an overhaul of its operations, slimming down its organisational structure; concentrating on three primary markets (UK, US , China) and focussing on cash management, reducing debt and leverage, and promising savings of GBP17m in the financial year, ahead of its own forecasts.
The company has a track record of performance and has delivered solid revenues and profit over the last three years. It is expecting an operating profit of GBP89.4m this year, GBP4m ahead of expectations. and has a consistent dividend policy, so is a good buy for income.
The company is slimmed-down and ready for a new year where it hopes it will make substantial inroads into new and lucrative markets. No a cheap buy, but Bakkavor has headroom for growth in 2024.
Steady growth, solid dividends
The sector is not the most exciting in the world – unless you are a real foodie or toothpaste connoisseur – but it is steady and consistent, and in depressed economic times, it is one sector where revenues might even increase.
Consumer Staples is definitely worth reconsidering as many a bargain can be found on its shelves. A good diversification play that balances out the risks of other sectors, Consumer Staples can provide a steady stream of income for investors seeking steady growth, solid dividends, and low volatility.
