Look to Your Local Grocery Store for Great Returns
Justin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When looking for a company that will thrive long term, a good place to start is basic needs. One basic need is food. Everybody has to eat, right?
There are a handful of food and beverage companies that have provided great returns over a long period of time. We will examine some blue chip food and beverage companies to see which of them belong in your portfolio.
Grab a soda and a bag of Doritos
- Price to earnings ratio: 19.95
- Annual dividend: $2.27
- Dividend yield: 2.70%
- 1 year price movement: 16.69%
Pepsi (NYSE: PEP) is a seasoned veteran of the dividend growth game. It has raised its dividend every year for the last 41 years. These raises have been at a rate above inflation, giving investors increased buying power over time. The dividend has slowed down some, with a 10 year dividend growth rate (DGR) of 13.6% down to a 3 year DGR of 6.4%. Pepsi's dividend payout ratio is 51% of earnings, so future dividend growth is not at risk.
Financially, Pepsi is a pretty smooth operation, but does have some areas of concern. It has a total debt-to-equity ratio of 1.3, meaning that it has more liabilities than assets. Pepsi does have good margins on its product, so there is cash coming in from its various iconic brands. Its net profit margin is a little over 10%, with a return on equity of almost 31%.
Looking ahead, Pepsi should be fine. It has seen a negative growth trend in its beverage business. But as a company, it is still growing due to its Frito Lay segment firing on all cylinders. In its latest earnings, Pepsi's Frito Lay saw 4.5% organic income growth, and 3% organic volume growth over last year.
Nothing but sweet, sweet growth
- Price to earnings ratio: 30.5
- Annual dividend: $1.94
- Dividend yield: 2%
- 1 year price movement: 35.71%
The Hershey Company (NYSE: HSY) has been growing at a rapid rate over the last 15 years, and the dividend has benefited as a result. Although Hershey went a year without a raise during the economic crisis, the dividend has still just about quadrupled in 15 years. The dividend payout ratio is 49%, so it looks like more dividend growth could occur.
Hershey has more debt than you would like to see. Its total debt to equity ratio is a bit scary at 1.7. Even with this kind of debt load, Hershey has the growth and margins necessary to remedy the situation. Hershey is getting a 67% return on equity (!), and a net margin of almost 11%. It's growing sales at 6% and earnings per share at almost 9%.
Thinking long term, Hershey as more growth to unlock. Hershey currently has limited international market presence. It has grown 11% in China this quarter from last year, while it still only has 7% market share there. It is also expanding to compete in South America, specifically in Brazil and Mexico. With as dominant as the Hershey brand has become domestically, there are enormous growth prospects available as Hershey ramps up around the world.
This company gives you everything
- Price to earnings ratio: 18.88
- Annual dividend: $1.52
- Dividend yield: 2.90%
- 1 year price movement: 37.16%
General Mills (NYSE: GIS) has raised its dividend for 10 years running, and has never cut its dividend. Its dividend has grown in the last 10 years at 8.7% annually. Its dividend payout ratio is 60%, which is about the highest you would like it to get before concerns creep in. Anything higher, and you start taking away from a company's capital to fund growth and pay down debt.
General Mills is in decent shape financially. Its debt to equity ratio is 1.2. While not ideal, there is no need for concern at this point. General Mills has a net profit margin of 10%, while getting a 28% return on equity. General Mills is also bound to keep the cash flow coming. Its sales have grown at a 5.4% rate over the last 5 years, while earnings per share have gone up almost 19% (TTM/TTM).
General Mills is seeing nice growth internationally. Its international sales are currently up 24% in net sales and up 14% in operating profits from last year. This should continue moving forward. General Mills is also innovating by spinning off variations of customer favorites and combining them with intense marketing campaigns. The intention of this is to grab more market share by using its recognized brands to drive new product growth.
The bottom line
You can fill your entire kitchen with products from these three companies alone. In addition to such a moat from economic pressure (everybody eats remember?), these companies carry incredible brand power, dividend growth at a high level and growth prospects through international expansion and innovation. You can feel comfortable being in these names long term.
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Justin Pope has no position in any stocks mentioned. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of PepsiCo. 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!