4 Ideas for Following Warren Buffett into Consumer Staples

consumer staplesWarren Buffett and a private equity partner 3G Capital swallowed Heinz (HNZ) whole, in a big $23 billion deal that some think will lead to activity all over the consumer staples space. As it turns out, mergers and acquisitions can be very good for stock investors.

Heinz is a strong, established brand in the slow-growing business of food, making it perfect for a value investor and private equity player. It isn’t the only company with a strong presence in food though.


Consumer Staples You Might Consider

Here are four stocks that deserve a look for investors who want to mimic Buffett’s recent move:

  1. Kimberly Clark (KMB) – One of the biggest players in personal care products, Kimberly Clark owns well-known brands including Kleenex, Scott, Kotex, and Huggies. The company has consistently increased quarterly dividend payments to investors while buying back roughly 5% of its total share count in the previous 5 years. While it might not have the best growth prospects given the state of the economy, any turnaround in the general climate could give the company a boost. At any rate, long term investors haven’t been dissatisfied by the company’s ability to slowly but steadily make shareholders wealthier.
  2. Philip Morris (PM) – While this one falls in the definite sin stock category (cue the socially responsible investing choir), Philip Morris has some of the most loyally addicted, highly-profitable customers one could find. The company’s mature business in the US and Europe is in perpetual decline (volumes decline by about 2% per year) but volumes in Asia are making up for losses in developed nations. This solid bet is backed by years of dividend increases and share repurchases. At 14x forward earnings, it trades at a slight discount to the broad market yet has one of the most consistent bottom line profits of any business.
  3. J.M. Smucker (SJM) – This company owns everything from coffee to PB&J. Smucker owns Folgers and Dunkin’ Donuts coffees, Smucker’s well known jams and jellies, as well as Jif peanut butter. The balance sheet makes this one a potential target for activism or a buyout. The company operates with half the debt of other companies in the same industry despite the fact that it has some of the most well-established brands in its space. Much like the others in this list, years of share repurchases and dividend increases have boosted the per-share price. At 20 times earnings and 16 times forward earnings, it’s not inexpensive, but it is a safe pick in consumer staples. Its differentiated brands should be able to pass on consistent price increases to customers – and what’s not to love about an addicted caffeinated product?
  4. Clorox (CLX) – Clorox owns more than just bleach. The same company that makes a cleaning product strong enough to kill you also makes KC Masterpiece sauces, Hidden Valley salad dressings, and Glad storage and waste products. Make no mistake about it; when Clorox competes for a category, it’s near the top. Glad has the most market share (33%) of any branded trash bag while Clorox has 65% marketshare in bleach. These brands have tremendous value and licensing potential. Investors pay up for its dominating market position, but earnings growth is exceptional given the company’s success in raising prices year after year (a trait Warren Buffett loves in a company).


Slow and Steady Stocks

Slow and steady growers make up the bulk of Warren Buffett’s corporate bullpen, and they should make up a sizable part of yours, too. Consumer staples are easy to understand – trash bags and cigarettes are as simple as it gets – these stocks are great for buying what you know.

While all of the above stocks trade at a slight premium to the broad market, they all offer competitive positioning you won’t find in most S&P 500 stocks. Look at companies like Buffett would by considering the resources necessary to knock the above stocks out of their category.

Could you really kill off Clorox or JM Smucker with a $10 billion cash pile? I’m not sure anyone could, but you know what they say, “if you can’t beat them, buy them.”

What are your thoughts on consumer staples?  Does slow and steady always pay?

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  1. says

    Good post JT! I think consumer staples can be a great way to go, especially if you do not have much knowledge in terms of investing in the market but want something you know. Like Buffett says, buy what you know. I’ve held PM in the past and have several of these on my watch list currently. On a side note, I’ll be interested to see if officials come up with anything on the options trading with Heinz.

    • says

      It never ceases to amaze me how people think they can get away with insider trading. That Heinz case won’t end well…I have a feeling that regulators will want to make an example of them given how much money was at play.

  2. says

    Hey JT, great article! I noticed someone on Google+ was mentioning that Buffett along with a few of the other “big guys” are quieting unloading their consumer staples right now as we see the Dow hitting record highs. I remember from much of my reading that they will sell into the bull market and sit quietly on the sidelines with their cash, ready to buy it all back at cheaper prices. Have you seen any evidence of this yet?

    • says

      I don’t see it. If there’s any rotation out of the sector I think it’s just people who are moving up to riskier stocks. When investors get comfortable, they tend to move out of the “safer” stuff like the consumer staples sector.

  3. says

    Warren Buffett certainly knows his stuff! Consumer staples provide consistent revenue streams through economic cycles and with a good business strategy can generate consistent returns to investors. Definitely a must have for any investment portfolio.

  4. says

    I must admit I was surprised by Buffets timing of the purchase of Heinz. It wasn’t a distressed asset, has been travelling along smoothly. Didn’t follow his classic plays like Geico, Amex, Bank of America, GE, Goldmans which all had an element of distress. I guess he has excess cash that he needs to more immediately put to work.

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