President-elect Donald Trump is promising tax cuts and fiscal stimulus, the stock market is surging to record highs and the unemployment rate is at a nine-year low. That might sound like a bag of goodies to most investors, but for those who own consumer staples stocks it is just lumps of coal.
Staples products and stocks are those boring things consumers and investors need, even if they don’t necessarily want to buy them. That is why the sector is viewed as “defensive,” because it tends to outperform during bad times. But during good times, when consumers and investors are more interested in buying fun stuff they may not necessarily need, staples don’t do so well.
The SPDR Consumer Staples Select Sector exchange-traded fund XLP, +0.19% edged up 0.2% in afternoon trade Friday, but has lost 1.2% since the election, which makes it the biggest loser of the SPDR ETFs tracking the S&P 500’s 11 sectors. Year-to-date, the staples ETF has gained just 3.1%, to make it the third worst performer. The S&P 500 index SPX, +0.13% has climbed 11% so far this year.
Perhaps that is why analyst Bonnie Herzog at Wells Fargo Securities and her team decided to send some cheer to staples investors, with her version of “Let it Snow.”
Breaking some of her lyrics down:
• “Oh, the rising interest rates are frightful…”
The yield on the 10-year Treasury note TMUBMUSD10Y, +0.00% has run up 68.1 basis points (or 0.681 percentage points) since the election to 2.54%, and is now above the annual payout yield of the staples ETF of 2.51%. High-yielding stocks tend to underperform during periods of rising interest rates, since investors aren’t as willing to be exposed to equity risk when they can get similar yields from Treasurys. See Bond Report.
• “But staples’ yields are still delightful…”
Steady earnings growth and cash flow allows consumer staples companies to pay out a relatively high dividend. The staples ETF annual payout rate is currently 2.51%, the third highest among the sector tracking ETFs, and well above the aggregate S&P 500 index yield of 2.08%, according to FactSet.
• “And earnings continue to grow.”
The sector’s third-quarter earnings per share grew 6.2% over year-ago levels, according to FactSet. That was the fifth-fastest rate of growth among the S&P 500’s SPDR sector trackers, and marked the third straight quarter that earnings increased.
• “The tobacco industry’s consolidation…”
British American Tobacco PLC BTI, +0.15% bid $ 47 billion in October to buy the 58% of Reynolds American Inc. RAI, +0.14% which owns the Camel and Newport cigarette brands, it didn’t already own. Also in October, Altria Group Inc. MO, +0.06% which owns the Marlboro and Chesterfield brands, said it became significant shareholder in beverages giant Anheuser-Busch InBev SA BUD, +0.65%
• “And the dollar is still inflating.”
Companies that sell overseas, like some tobacco companies, aren’t necessarily in favor of a stronger dollar DXY, -0.16% because it makes the profits and sales earned overseas worth less when exchanging them for dollars.
The U.S. Dollar Index has run up 5.2% since the election. See Currencies.
• “Next year we may see cash repatriating.”
Trump used this as one of his campaign platforms: lower the corporate tax rate, so companies holding cash overseas because they are unwilling to bring it home to be taxed at relatively high rates, will bring that cash back home and create jobs with it. For companies with overseas exposure, like tobacco sellers, that could be good news.
• “This year the market reached new heights…”
The Dow Jones Industrial Average DJIA, +0.07% closed at 17 record highs in the past 31 sessions since the election, while the S&P 500 index has closed at eight records over the same time. See Market Snapshot.
• “And our coverage expanded to HPC…”
HPC stands for home and personal care.
The rest is cheerfully self explanatory.