Consumer staples stocks are excellent additions to any diversified investment portfolio because the businesses are supposed to have limited impact (if any impact at all) from the ups and downs of the economic cycle. This means that the earnings of these businesses should be defensive even when we experience recessions. Notably, I said “earnings” and not “stock prices”.
Investors should beware that even when a business’s earnings stay resilient, the stock could still fall. Market spectators have many viewpoints to explain this. One reason could be that earnings growth turns out to be lower than expected so the stock experiences price-to-earnings multiple (P/E) contraction, leading to a stock price decline. This seems to be the scenario playing out for Jamieson Wellness (TSX:JWEL) since 2023.
At a high level, the company manufactures, distributes, and markets branded natural health products, including vitamins, minerals, and supplements. The stock had its initial public offering in 2017. From 2018 to 2022, it experienced a double-digit earnings growth rate. The growth was flat in 2023, which has weighed on its P/E, pulling it down from north of 20 in 2018 to 2022 to about 16.8 times today.
If double-digit growth were to resume in the future, at the current price of $26 and change per share, it is a good time to buy the consumer staples stock. At this price, it also offers a dividend yield of almost 2.9%, which is relatively high compared to its historical yield of typically below 2%. Its payout ratio is about 50% of its earnings. And since the company is not overly leveraged, has defensive earnings, and has retained earnings that cover 2.5 years of dividends, its dividend should be safe.
Yahoo Finance shows that according to nine analysts the stock is worth $35.33 per share, which represents a decent discount of approximately 26%. If the stock valuation normalizes over the next three years based on a resumption of growth, buyers today are looking at a solid total return of north of 13% per year!
Another TSX consumer staples stock worth a closer look
Another TSX consumer staples stock worth a closer look by investors is Saputo (TSX:SAP). The packaged foods company produces, markets, and distributes a range of dairy products, including cheese, milk, extended shelf-life milk, cream products, cultured products, and dairy ingredients, generating close to 72% of its revenues from the United States and Canada.
The stock has been weak lately, falling almost 30% from its 52-week high. The weakness could be a buying opportunity for investors waiting for a normalization in the valuation. Yahoo Finance shows an analyst consensus price target of $32.28 per share, which represents a near-term upside of 25%. Plus, like Jamieson Wellness, the stock offers a dividend yield of close to 2.9%.
Its payout ratio is about 48% of its earnings. The company also has low leverage, resilient earnings, and retained earnings that covers almost 19 years of dividends. So, its dividend appears to be rock solid.
If you think it’s too thrilling to buy into the weakness of these consumer staples stocks, you can consider investing in the iShares S&P/TSX Capped Consumer Staples Index ETF instead. The exchange-traded fund (ETF) offers more diversified exposure to TSX consumer staples stocks.
