3 Consumer Stocks with Robust Growth and Solid Dividends

Faizan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The broad equity market is tumbling on Fed tapering signals. The dividend stocks in the market are the ones that are being hurt the most. However, there are dividend stocks that offer both the potential for dividend growth and price appreciation that makes them attractive for investors. In this article I will discuss companies that have high growth forecasts, solid dividend yields, significant international market exposure and strong market positions in their respective industries. The companies being discussed are Philip Morris (NYSE: PM), Kellogg (NYSE: K) and Procter & Gamble (NYSE: PG).

Growth

Developed markets are mature and competitive. Because of this, companies with significant international market exposure have an added advantage of higher growth opportunities. The higher growth potential bodes well for the companies’ bottom lines expansion and stronger balance sheet.

Procter & Gamble generates approximately 60% of its total sales from its international market operations. The company has also been working to improve its operational efficiency and cost structure, something that is likely to boost its earnings. Analysts project that the company might experience an impressive next five years growth rate of 7.6% on average.

With product markets in more than 180 countries, Kellogg is the leading frozen foods and cereal producer worldwide. The company earns an impressive 35% chunk of its revenues from international markets, resulting in geographical diversification and earnings expansion for the company. Productivity gains and continued revenue and cost synergies related to Pringles are important factors for the earnings potential of the company. For the coming five years, analysts are anticipating Kellogg to enjoy a high growth rate of 7.8%.

Philip Morris, the leading tobacco company in the world, holds a dominating market share of 27%-28%. The company’s international market exposure and a strong brand portfolio have resulted in earnings expansion. A share repurchase initiatives have been undertaken to expand its earnings, with the company currently pursuing a share repurchase initiative of $18 billion. Analysts’ earnings growth expectations for Philip Morris are at 11% per year for the next five years.

The following table shows the analysts earnings consensus for the above mentioned three companies from 2013 up till 2016.

<table> <thead> <tr><th> </th><th> <p><strong>2013</strong></p> </th><th> <p><strong>2014</strong></p> </th><th> <p><strong>2015</strong></p> </th><th> <p><strong>2016</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Procter & Gamble</strong></p> </td> <td> <p>$4.04</p> </td> <td> <p>$4.33</p> </td> <td> <p>$4.68</p> </td> <td> <p>$5.18</p> </td> </tr> <tr> <td> <p><strong>Kellogg</strong></p> </td> <td> <p>$3.86</p> </td> <td> <p>$4.16</p> </td> <td> <p>$4.48</p> </td> <td> <p>$4.93</p> </td> </tr> <tr> <td> <p><strong>Philip Morris</strong></p> </td> <td> <p>$5.59</p> </td> <td> <p>$6.22</p> </td> <td> <p>$6.91</p> </td> <td> <p>-</p> </td> </tr> </tbody> </table>

Source: Nasdaq.com

Dividends

The three companies mentioned above also offer solid dividend yields in addition to their impressive growth potential. The dividends offered by the companies are backed by strong cash flows. The following tables display the dividend yields, payout ratios and dividend coverage for each of the three companies.

<table> <thead> <tr><th> </th><th> <p><strong>Dividend Yield</strong></p> </th><th> <p><strong>Payout Ratio</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Procter & Gamble</strong></p> </td> <td> <p>3.1%</p> </td> <td> <p>50%</p> </td> </tr> <tr> <td> <p><strong>Kellogg</strong></p> </td> <td> <p>2.7%</p> </td> <td> <p>69%</p> </td> </tr> <tr> <td> <p><strong>Philip Morris</strong></p> </td> <td> <p>3.7%</p> </td> <td> <p>64%</p> </td> </tr> </tbody> </table>

Source: Yahoo finance

<table> <thead> <tr><th> </th><th> <p><strong>2010</strong></p> </th><th> <p><strong>2011</strong></p> </th><th> <p><strong>2012</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Procter & Gamble</strong></p> </td> <td> <p>2.30x</p> </td> <td> <p>1.85x</p> </td> <td> <p>1.80x</p> </td> </tr> <tr> <td> <p><strong>Kellogg</strong></p> </td> <td> <p>-</p> </td> <td> <p>1.60x</p> </td> <td> <p>2.70x</p> </td> </tr> <tr> <td> <p><strong>Philip Morris</strong></p> </td> <td> <p>2.00x</p> </td> <td> <p>2.00x</p> </td> <td> <p>1.60x</p> </td> </tr> </tbody> </table>

Catalysts

Procter & Gamble has been working on improving its costs structure. These cost-curtailing and operational efficiency-improving efforts are likely to translate into savings of $10 billion by the end of the 2016 fiscal year. The company’s significant emerging market exposure will fuel growth and is another important stock price catalyst.

Kellogg’s ongoing efforts to improve productivity, as well the realization of expected synergies from the acquisition of Pringles and the cost of inputs (raw materials), will be important stock price drivers in the near future.

I believe the most central performance driver for Philip Morris is how tactfully the company works towards alternate tobacco categories. As the tobacco industry has been suffering from declining volume, alternate tobacco categories holds a critical importance for the tobacco industry and Philip Morris.

Risks

The three companies mentioned above have significant international market exposure, adding to the foreign currency risk in their portfolios. The strengthening of the dollar against other world currencies can negatively impact the revenues and eventual earnings of the companies as a result.

Foolish bottom line

All three companies have delivered strong financial performances in the past and have robust growth projections. Furthermore, these companies offer decent and safe dividend yields which are backed by their strong cash flows. Healthy growth projections for the companies will result in dividend growth in future as well. In the ongoing low-yield environment, these Procter & Gamble, Phillip Morris and Kellogg all remain attractive investment options for income-seeking investors. Therefore I remain bullish on these stocks.

Tobacco companies have been under siege in the U.S. for decades, as waves of litigation, regulation, and anti-smoking campaigns have given the industry a black eye. Yet Philip Morris International focuses on overseas markets, where business prospects generally look brighter. Investors have been happy with its stock's performance, but is Philip Morris still a buy? Find out in The Motley Fool's premium research report on the company, which includes in-depth analysis of its opportunities and challenges ahead. To claim your report just click here now.

 


Faizan Chudhry has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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