Consumer staples are often considered to be defensive stocks, meaning that they tend to perform well even when the economy is weak or uncertain. So, as the breakout tech leaders that drove the stock market's first-half gains start to pull back on resurgent macroeconomic concerns, there's no better time to discuss some of the current opportunities in these defensive household names.
Among this group, General Mills (GIS) and Kraft Heinz Company (KHC) are two of the largest food companies in the world, with each company boasting a market cap in excess of $42 billion. They both produce and sell a variety of packaged foods, such as cereals, snacks, sauces, cheese, and dairy products.
However, the two companies have some notable differences when it comes down to their financial performance, growth prospects, and yield. Which one is a better defensive play right now? Let’s find out.
GIS: Analysis and Performance Metrics
General Mills (GIS) is a leading global manufacturer and marketer of branded consumer foods, such as Cheerios, Yoplait, Nature Valley, and Häagen-Dazs. The company also operates a pet segment that includes Blue Buffalo pet products. GIS sells its products through retail stores, e-commerce platforms, and food service and convenience channels in more than 100 countries.GIS has been on a steady upward trajectory since late 2019, culminating in a record high of $90.19 in May 2023. The shares have since pulled back, and are underperforming the S&P 500 Index ($SPX) on a year-to-date basis - though, over the longer term, GIS has outperformed the S&P by a wide margin over the last two years.
The company's performance owes much to the heightened demand for its packaged foods and snacks during the COVID-19 pandemic, strategic acquisitions, and innovations. Notably, GIS has also maintained a robust dividend policy over the years and offers a current yield of 3.27%, which is above the sector average.
A key growth driver for GIS has been its acquisition strategy, which has enabled the company to expand its portfolio of brands and products, enter new markets and categories, and leverage synergies and scale. Some of the notable acquisitions that GIS has made in recent years include Annie's (a natural and organic food company), Epic Provisions (a meat snack company), Blue Buffalo (a natural pet food company), and Tyson Foods' pet treats business. These acquisitions have helped GIS diversify its revenue streams, enhance its margins, and tap into the growing consumer demand for natural, organic, and premium products.
On the earnings front, GIS reported its most recent quarterly results on June 28. Net income arrived at $614.9 million, or $1.12 per share, on revenue of $5.03 billion for the quarter ended May 30. This marked a 15.46% increase in EPS from the prior quarter, although it remained flat year over year.
Looking ahead, analysts are expecting steady earnings growth from General Mills, with the consensus calling for increases of 4.65% for fiscal year 2024 and 5.33% for fiscal year 2025. Based on 17 analysts’ opinions, 6 call the stock a “strong buy,” 9 rate it a “hold,” and 2 recommend a "strong sell." This shows that analysts remain generally bullish about the stock, judging by the overall rating of “Moderate Buy” with a mean target price of $81.75. This implies an upside potential of about 13% from current levels.
KHC: Analysis and Performance Metrics
Kraft Heinz is one of the largest food and beverage companies in the world, with iconic brands such as Kraft, Heinz, Oscar Mayer, Planters, Philadelphia, and Maxwell House under its umbrella. The company operates in five segments: U.S., International, Canada, EMEA (Europe, Middle East, and Africa), and the Rest of the World.
KHC's underperformance on the charts accelerated significantly in early 2019, thanks to news of a historically massive $15.4 billion impairment charge - which coincided with a 36% dividend reduction for shareholders.
As the company grappled with an SEC probe, weak sales growth, high debt levels, and operational inefficiencies, KHC's dividend underwent three additional cuts.
The impairment charge, one of the largest such write-downs taken by any company since the financial crisis, reflected the deterioration in the value of some of KHC's most well-known brands, such as Kraft and Oscar Mayer. The impairment charge also indicated that KHC had overpaid for its merger with Heinz in 2015, which was orchestrated by Warren Buffett and Brazilian private equity firm 3G Capital.
Although the stock touched a record low of $17.38 in March 2020, coincident with the onset of the pandemic, KHC's share price has since staged a partial recovery due to improved earnings and cost-saving strategies.
KHC posted net income of $1 billion, or $0.79 per share, on revenue of $6.72 billion for the quarter ended June 27. This translated to a 16.18% increase in EPS from the previous quarter and 12.86% growth from the same quarter last year.
Unlike General Mills, analysts expect KHC's annual earnings growth rate to cool in the years ahead. The consensus is looking for earnings growth of 3.96% for fiscal year 2023, followed by a more moderate uptick of 2.77% for fiscal 2024.
Based on 14 analysts’ opinions, 5 recommend a “strong buy” and 9 a “hold” for KHC. This indicates that analysts remain generally bullish about the stock, judging by the overall rating of “moderate buy” with a mean target price of $41.92. This implies expected upside of about 22.7% from current levels.
Which Consumer Defense Stock is Currently a Better Buy?
On balance, GIS has better long-term price action, a more consistent and sustainable dividend policy, robust earnings growth projections, and a more aggressive and successful acquisition strategy than KHC. GIS also has a solid outlook and a competitive edge in the packaged food industry and is likely to continue delivering value to its shareholders in the long run.
KHC, on the other hand, has reduced its dividend three times since 2019, and the price action in the stock is not exactly the picture of stability, either. While KHC offers a yield of 4.63%, the total return is less appealing, given an 8% decline in the share price over the last year.
Kraft Heinz has some potential to improve its performance and profitability in the next few years as it continues to recover from the expensive mistakes of its merger - but the company also faces significant challenges and uncertainties in the competitive and dynamic packaged food industry, and may need to invest more in innovation and brand building to regain and grow market share.
Therefore, for those investors looking to add exposure to consumer defensive plays, GIS offers more advantages and fewer risks than KHC.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
