Consumer staples companies sell things that people tend to buy regardless of the economic environment and stock market dynamics. They are looked at as safe-haven investments for that reason.
But two of the industry’s best-known companies are struggling today and, if you think long term, that is likely to be a buying opportunity. Here’s why these two monster food stocks are buy-and-hold investments for the next decade.
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1. PepsiCo is the snack king
PepsiCo (NASDAQ: PEP) is named after its famous soda brand. Beverages are a very important business, but the company is the No. 2 player in the beverage industry. It is the No. 1 company in salty snacks, however, with its Frito-Lay brand. It also has a material packaged food business in Quaker Oats.
All in, it is one of the most diversified consumer staples food companies you can buy, with strong innovation, distribution, and marketing skills.
Image source: Getty Images.
And still the company’s business, like all others, goes through good times and bad. Right now, PepsiCo is facing bad times, with top-line growth cooling after a spurt of inflation-driven growth coming out of the coronavirus pandemic. Frito-Lay is also facing some headwinds as snacking trends appear to be changing.
This isn’t the first time PepsiCo has dealt with adversity over the last 53 years. That’s how long it has increased its dividend, proving that this Dividend King knows how to survive. You have to have a good business model that gets executed well in both good times and bad to achieve a dividend record like that.
The key today is that PepsiCo isn’t sitting around idle, hoping for things to change. It is focused on cutting costs, improving efficiencies, and adjusting its mix to better appeal to consumers. That last point includes everything from changing the size of its packages to buying entire companies, like Siete, which makes Mexican-American fare, and Poppi, which makes probiotic beverages. Siete and Poppi are on-trend brands that will benefit from being plugged into PepsiCo’s powerful distribution system.
It may take a few years for PepsiCo to work through to better days. But with a historically high 4.4% dividend yield, investors are being paid very well to wait it out.
2. Hershey is a confectionary giant
While Hershey (NYSE: HSY) isn’t the largest consumer staples company around, it is the U.S. leader in the confections space. You almost certainly know its namesake brand and its powerful Reese’s franchise. While it doesn’t have the same Dividend King status as PepsiCo, Hershey’s dividend has trended steadily higher over time. The dividend yield is a historically high 3.4% or so today.
The big problem facing Hershey right now is an astonishing rise in cocoa prices. Cocoa, a somewhat volatile commodity even during the best of times, is a key input into chocolate. The rising costs for cocoa will be a major headwind to margins in the near term.
Investors have dumped the stock because of the high cocoa prices it is facing. There’s no quick fix here, given the nature of the cocoa market (cocoa comes from trees, which take time to grow). So the issue could linger.
What hasn’t changed, however, is Hershey’s dominant industry position, or its plans to grow by acquiring non-chocolate confection businesses and salty snack brands.
The key to this long-term approach, however, is couched in the fact that The Hershey Trust, a charitable organization, basically has voting control of Hershey the company. This means that Hershey the company can think long term even when Wall Street is thinking short term because The Hershey Trust desires a reliable and growing dividend to support its philanthropic efforts. That’s probably what you want, too, but to support your spending needs in retirement.
If you don’t mind collecting a lofty dividend yield from a confectionary giant, waiting for Hershey to muddle through the current cocoa headwinds could be for you.
PepsiCo and Hershey are two monster dividend stocks
The average consumer staples stock yields around 2.5% today. Both PepsiCo and Hershey provide way more income. And while they each face specific business headwinds that have left them out of favor with investors, each company remains a giant in the niches where they compete.
If you think in decades and not days when you buy dividend stocks, PepsiCo and Hershey should be on your buy list today.
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Reuben Gregg Brewer has positions in Hershey and PepsiCo. The Motley Fool has positions in and recommends Hershey. The Motley Fool has a disclosure policy.
