We Avoided the Cliff: But Now Will We Bump Our Heads on the Ceiling?

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The market applauded the partially-resolved fiscal cliff deal, as it jumped over 300 points on Wednesday. This excessive optimism, however, should come with more caution. The dreaded debt ceiling deadline will soon be approaching, and the cliff deal reached by Washington hasn't really outlined any significant spending cuts. Moody's has already came out and said that the fiscal cliff deal doesn't eliminate the threat of a credit downgrade to the United States' credit rating. Moody's sees the ratio of debt to economic output remaining at a high of about 80% in 2014 to the upper 70% range for the rest of the decade, and feels that additional steps need to be taken. Fitch ratings also reiterated its negative outlook last week, as cited by the Los Angeles Times. It may be wise to be safe at this point, rather than sorry. Defense may still be the best offense.

Defensive Plays For 2013:

  • The J.M. Smucker Company (NYSE: SJM) engages in manufacturing and marketing branded food products primarily in the United States, Canada, and internationally. The company’s product portfolio includes coffee, peanut butter, fruit spreads, shortening and oils, baking mixes and ready-to-spread frostings, canned milk, flour and baking ingredients, juices and beverages, frozen sandwiches, toppings, syrups, and pickles and condiments. 
  • H. J. Heinz Company (NYSE: HNZ), together with its subsidiaries, manufactures and markets food products for consumers, and foodservice and institutional customers in North America, Europe, the Asia Pacific, and internationally. Its principal products include ketchup, condiments and sauces, frozen food, soups, beans and pasta meals, infant nutrition, and other food products. 
  • Sysco Corporation (NYSE: SYY), through its subsidiaries, engages in the marketing and distribution of a range of food and related products primarily to the foodservice or food-away-from-home industry. The company distributes a line of frozen foods, such as meats, fully prepared entrees, fruits, vegetables, and desserts; a line of canned and dry foods; fresh meats; dairy products; beverage products; imported specialties; and fresh produce. It also supplies various non-food items, including paper products, such as disposable napkins, plates, and cups; tableware comprising china and silverware; cookware consisting of pots, pans, and utensils; restaurant and kitchen equipment and supplies; and cleaning supplies.
  • The Coca-Cola Company (NYSE: KO), engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. The company primarily offers sparkling beverages and still beverages.
The above companies have simple, easy to understand businesses with low betas. These companies sell basic consumer products that are less susceptible to economic hardship and uncertainties. Smuckers will continue to sell peanut butter and their cheap Folger's brand coffee in down markets. People aren't going to stop buying Crisco (another Smucker's brand) because of economic uncertainty. HJ Heinz makes most of its money from selling condiments like its signature Ketchup. Coca-cola has worldwide brand recognition and one of the strongest brand portfolios of non-alcoholic beverages in the world. Sysco is by far the largest food distributor in the United States and has increased their dividend for years.
 
Valuations:
 
<table> <tbody> <tr> <td> </td> <td><strong>SJM</strong></td> <td><strong>HNZ</strong></td> <td><strong>SYY</strong></td> <td><strong>KO</strong></td> </tr> <tr> <td><strong>Price</strong></td> <td> <p>$89.66</p> </td> <td>$58.89</td> <td>$31.09</td> <td>$37.06</td> </tr> <tr> <td><strong>Price to Earnings (ttm)</strong></td> <td>20.75</td> <td>18.91</td> <td>16.97</td> <td>19.65</td> </tr> <tr> <td><strong>Forward P/E</strong></td> <td>15.81</td> <td>15.54</td> <td>15.05</td> <td>17.25</td> </tr> <tr> <td><strong>Dividend/yield</strong></td> <td>2.08 (2.40%)</td> <td>2.06 (3.60%)</td> <td>1.12 (3.50%)</td> <td>1.02 (2.80%)</td> </tr> </tbody> </table>
Data from Yahoo finance
 
Each company is reasonably priced going forward, and offers a relatively nice, safe dividend coupled with a sustainable payout ratio:
 
<img src="/media/images/user_14543/screen-shot-2013-01-03-at-121116-am_large.png" />
 
 
The Bottom Line
 
These companies may be somewhat boring, because they are simple and predictable, but they are also fairly dependable. Smuckers recently reported a solid quarter, and has increased its EPS outlook for 2013. Heinz also reported solid results at the end of their last quarter. Sysco beat analyst expectations at the end of their last quarter, and reported solid sales growth- despite a decline in profits which were attributed to higher food costs. Sysco, however, is also better positioned to withstand higher costs when compared to its smaller competitors. Coca-cola reported modest growth, as well.
 
These are companies that are defensive in nature and aren't expected to shoot up over night. They are, however, companies that should let an investor sleep better at night knowing they own financially strong companies with solid dividend yields; capable of weathering a storm of uncertainty relatively well compared to many other, more volatile companies traded on the market. It never hurts to add some defensive players into your portfolio- especially when more uncertainty is expected from the next potential congressional debacle around the corner, resulting from debt ceiling disputes. 



Jharry1 owns shares of The Coca-Cola Company and The J.M. Smucker Company. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend H.J. Heinz Company, The Coca-Cola Company, and Sysco . 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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