Food stocks are worth a nibble after their worst showing relative to the
in more than 20 years.
The sector, known for its stability, isn’t supposed to make investors queasy, but that’s exactly what it has done this year. It’s down 10% in 2023 as measured by the packaged-food group of the S&P 500, against a 16% rise in the index—and the poor performance has come entirely since May.
Stocks like Kellogg (ticker: K),
Brands (CAG), and
(CPB) are off 15% to 25% in 2023, and a few are back where they stood 10 years ago—or even lower.
Why bother with the normally stodgy sector? For starters, valuations have come down and look reasonable. Kraft Heinz and Conagra trade for about 11 times projected current year earnings. Kellogg, General Mills, and Campbell fetch around 14 times earnings—a nice discount to the S&P 500’s roughly 19 times.
Dividends are ample and look well-covered by earnings, too. Many food companies sport dividends ranging from 3.5% to nearly 5%, while the average dividend payout ratio is around 50%. Leverage ratios are at multiyear lows, leaving more room for higher dividends or stock buybacks.
The timing may also be right. Over the past 50 years, defensive food stocks have tended to outperform the market in the final four months of the year, says Stifel analyst Matthew Smith, as portfolio managers look to protect gains from earlier in the year. Like clockwork, food stocks held steady this past week as tech shares pulled back.
There are reasons food stocks have fallen out of favor, of course. Wall Street analysts, who are decidedly lukewarm on the sector, cite declining sales volume, private-label competition, sluggish profit outlooks, and higher interest rates as reasons to think twice about investing in the group.
Though many companies target annual…