The consumer staples sector is home to some of the world’s most well-known dividend growth stocks. In fact, the consumer staples sector has the most Dividend Aristocrats of any individual market sector.
Consumer staples stocks also appeal to risk-averse investors as defensive industries such as food and beverage and personal care products see steady demand, even during recessions.
The following 3 consumer staples stocks have high expected returns above 10% per year.
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Walgreens Boots Alliance (WBA)
Walgreens Boots Alliance is the largest retail pharmacy in both the United States and Europe. Through its flagship Walgreens business and other business ventures, the $9.5 billion market cap company has a presence in 9 countries, employs more than 330,000 people, and has about 12,500 stores in the U.S., Europe, and Latin America.
On October 17th, 2024, Walgreens reported results for the fourth quarter of fiscal 2024. Sales grew 6%, but earnings-per-share decreased 41% over last year’s quarter, from $0.66 to $0.39, due to intense competition, which has eroded the profit margin.
As the pandemic has subsided and competition has heated in the retail and pharmaceutical industry, Walgreens faces tough comparisons. It provided guidance for earnings-per-share of $1.40 to $1.80 in fiscal 2025, implying a -44% decrease at the mid-point.
Over the long term, an aging population and a focus on becoming a health destination should provide tailwinds. However, due to the unprecedented pressure on profit margins amid intense competition, Walgreens is in the middle of a major turnaround involving the permanent shutdown of about 1200 stores.
Therefore, the stock is surrounded by high uncertainty. Due to the low comparison base formed by the 10-year low earnings in fiscal 2024, we expect 4.0% growth of earnings-per-share over the next five years.
After 47 consecutive years of dividend growth, Walgreens slashed its dividend by 48% this year. It had a decent payout ratio of less than 60% but cut its dividend to reduce its debt load. On the other hand, we view the dividend cut as a healthy decision from a long-term perspective amid a challenging business landscape.
Even after the dividend reduction, WBA stock still yields 10%. Total returns are expected to reach 17.5% per year over the next five years.
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PepsiCo Inc. (PEP)
PepsiCo is a global food and beverage company that generates $89 billion in annual sales. The company’s products include Pepsi, Mountain Dew, Frito-Lay chips, Gatorade, Tropicana orange juice, and Quaker foods. The company has more than 20 $1 billion brands in its portfolio. Pepsico is the our second favorite consumer staples stock.
On February 9th, 2024, PepsiCo announced that it would increase its annualized dividend by 7.1% to $5.42, starting with the payment made in June 2024, extending the Dividend King’s dividend growth streak to 52 consecutive years.
On October 8th, 2024, PepsiCo reported third-quarter results for the period ending September 30th, 2024. Revenue fell 0.5% for the quarter to $23.3 billion, which was $460 million below estimates. Adjusted earnings-per-share of $2.31 compared favorably to $1.97 the prior year and was $0.02 ahead of expectations. Currency exchange reduced revenue and earnings-per-share by ~2%. Organic sales improved 1.3% for the second quarter and 1.9% year-to-date. Volumes for both food and beverage were down 2%.
PepsiCo Beverages North America’s revenue once again grew 1% organically as higher prices more than offset a 3% decline in volume. Revenue for Frito-Lay North America declined 1% as volume was lower by 1.5%.
PepsiCo grew earnings at a rate of 6.6% per year from 2014 to 2023. We reaffirm our expected earnings growth rate to 6% from 5.5% to better reflect the company’s long-term growth trends and its portfolio of billion-dollar brands. PepsiCo’s growth over this period will accrue from organic sales and share repurchases.
PepsiCo is a relatively recession-proof company. Earnings grew during the last recession, and the dividend yield is generous. The company expects to return $8.2 billion in cash to shareholders in the form of dividends and share repurchases in 2024.
Total returns are expected to reach 13.7% per year over the next five years.
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Albertsons Companies Inc. (ACI)
Albertsons (ACI) is one of the largest food and drug retailers in the United States. With $70 billion in annualized sales, a market cap of $11 billion, and a history dating back to the 1860s, Albertsons went public in 2020 and has paid a quarterly dividend ever since. It is our third consumer staples stock on this list.
The company reported its Q2 2024 results on October 15th, 2024, and announced a quarterly dividend of $0.12 per share. With Q2 earnings of $0.25 per share, the company’s forward annualized dividend of $0.48 is well covered by their ongoing business. During the second quarter, investments in the company’s “Customers for Life” strategy drove strong digital sales and pharmacy operations growth.
Identical sales increased by 2.5%, digital sales increased by 24%, while gross margin remained unchanged at 27.6%. During the year’s first half, the company spent $952 million on CAPEX, primarily related to remodels, store openings, and digital and technology platforms. The pending merger with Kroger is still blocked.
This is a mature, well-established, and stable industry, which means growth rates will be low and primarily in line with GDP growth. The fact that ACI is one of the largest players in this industry and that retailing has notoriously low margins means that earnings-per-share growth will likely be small. We forecast 3% annual earnings-per-share growth along with dividend growth in line with earnings-per-share growth.
Albertsons is a large company with more than 3,000 stores. This allows them to compete on location, and with $70 billion in revenue, it’s clear that they have the scale and product availability to compete with the other large U.S. grocery retailers. These efficiencies of scale make the business remarkably stable and able to support its ongoing dividend.
ACI stock currently yields 2.6%. Total returns are expected to reach 13.3% per year over the next five years.
Disclosure: The author has a long position in PEP.
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Bob Ciura
Bob Ciura is President of Content at Sure Dividend. Bob has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. Bob received a bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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