|A common bit of advice is that you should invest in what you know, and food is something we all know well.|
BOSTON ( TheStreet) -- The next time you head into the kitchen for a snack you may also be able to satisfy your appetite for quality investments. A common bit of advice is that you should invest in what you know, and food is something we all know well. Are there benefits to a "refrigerator portfolio," choosing investments based on the brands you and your family buy?
Open the fridge and take a peek. Are there Heinz ( HNZ), Coca-Cola ( KO) or Pepsi ( PEP) bottles? Hormel ( HRL) meats (Spam anyone?) or Tyson ( TSN) chicken strips, perhaps? Are there Hershey ( HSY) bars chilling in the freezer or cereal boxes from Kellogg ( K) and General Mills ( GIS) stocked beside it? Is there a box of Arm & Hammer baking soda (made by Church & Dwight ( CHD)) wedged in the back, alongside a can of Kraft's ( KFT) Maxwell House coffee and some Sara Lee ( SLE) pound cake or Jimmy Dean sausages? Did you stock up on all those goodies at Safeway ( SWY), Kroger ( KR), Whole Foods ( WFM), Wal-Mart ( WMT) or Target ( TGT)? If you assume -- probably correctly -- your neighbors buy similar products, these refrigerator stocks could beef up your portfolio and keep your retirement plan well-fed. Mitch Schlesinger, CFA, managing director of FBB Capital Partners in Bethesda, Md., says now might prove a great time to get a taste for food company stocks. "It makes some sense, especially in volatile markets, because those companies tend to have stable recurring cash flows, which gives them business stability," he says. "We used to think of them as recession-proof. Maybe that's not quite accurate, but they do tend to be repeat purchase items that people buy year in, year out, in good times and bad."
"Sometimes you hear of people shifting toward generic or store brands," Schlesinger says. "But for the most part, people are pretty picky about the brands of food and other products that they buy on a recurring basis. They tend to come back to the brand names as soon as they can. People can be very, very brand loyal, especially when you have kids who like the Kraft Mac & Cheese more than the store brand." That company made headlines last week when it announced it would split into two companies. One half will focus on grocery items; the other will market cookies, snacks and the like to overseas markets. Thomas Cameron is chairman of Ridgeland, SC based Dividend Growth Advisors. Its philosophy is to invest only in stocks that have increased their dividend every year for at least 10 years, by a minimum average of 10% a year. If anybody cuts the dividend, it is an immediate sell. Such screening, Cameron says, has steered him away from bank and financial stocks. His focus now is health care companies and energy stocks. Food companies also make the cut, even if not all consumer staples are worth it. "There are several companies in the field that we used to own, like Procter & Gamble ( PG), that we don't own anymore because our view of the earnings were changed by the thought that most of their products are of the high end of the areas they serve," Cameron says. "With a lot of people being in more difficult circumstances, they are buying more unbranded names. That doesn't mean to say we are not interested in it, but their rate of earnings gain has gone down a lot." Nevertheless, many food companies benefit from their global potential, he says. With drought conditions and food production failing to keep pace with growing populations, America's food companies have growing market potential in both emerging and developed countries. Cameron points to water shortages in China -- which averages about half the per capita water supply here in the U.S. -- that have been exacerbated by efforts to shift its population to coastal areas, as dictated by the logistics of manufacturing and transportation. This ensures that they will be a buyer of imported food. "In terms of food, in the different economies and nations that grow stuff, about 70% of the water is used for agriculture," Cameron says. "So if you are way out of water, you are going to start buying more stuff from places like the United States or in Brazil."
A favorite food company is Archer Daniels Midland ( ADM). He points to that company as having a great record of increasing their dividend yield year after year. If you have a leftover bag of fries or Chicken McNuggets holding court in a corner of your fridge, you might also benefit by having McDonald's ( MCD) claim space in your portfolio. "They have only increased their dividend an average over the last 10 years of about 28% a year and they have increased their dividend for 34 years in a row -- nothing special," Cameron says with a chuckle. Are you a Coke or a Pepsi person? No matter which you prefer in your fridge, both could prove refreshing for your portfolio. Cameron says Pepsi has increased its dividend 39 years in a row. Coca-Cola has increased its dividend 49 years in a row. McCormick ( MKC), which makes household seasonings and spices, has increased its dividend an average of more than 13.4% a year for 24 years, he says. Cameron's favorite among food companies, the one he would own if limited to just one, is Nestle ( NSRGY), which has pushed its various brands into more than 100 countries. If you keep bottled water in your fridge, you can understand why Nestle has one growing market in particular. As one of the world's largest distributors of bottled water, it has sold billions of bottles. Schlesinger agrees that the dividend potential of food stocks make them appealing. "We tend to be an income-oriented shop, so we have a bias toward dividends," he says. "We like to see the strength of the cash flow behind that, which helps in our equity purchase decisions. The dividend is a great thing, whether or not people are using that dividend as income or reinvesting it to build value over time."
Schlesinger admits that even with international expansion potential, there are potential drawbacks for food stocks. Chief among them is rising agricultural commodity costs. Another concern is currency fluctuations. "The rising commodity input cost is definitely a factor," he says. "Sugar has been particularly all over the place during the past year or so. It has gone through some wild swings. We are seeing that with corn as an input to many products as well." The price is expected to increase nearly 10% because of the demand for ethanol and livestock feed, he says, and "long term, it is something that concerns us and we have to keep our eye on." Schlesinger cautions against putting all your eggs in one basket. Food-related stocks should be part of a diversified portfolio, he says. "But, that being said, for an investor that is concerned with a relative degree of safety for the underlying business, we think it could be a meaningful component to many portfolios, for individual investors in particular," Schlesinger says. "Consumer staples have traditionally been considered among the most defensive ... One point to keep in mind is that these stocks may underperform in an up cycle, where more aggressive growth companies tend to outperform. But hopefully with the added dividend and the stability of the business they potentially give you some additional downside protection when markets are more volatile." For those looking for more than just individual companies to populate their portfolio or retirement plan, a variety of ETFs and ETNs have a food focus. Among them are the BS E-Tracs CMCI Food Total Return ETN ( FUD); the Market Vectors Agribusiness ETF ( MOO), which looks at global agriculture companies; Global X Food ETF ( EATX) and PowerShares Dynamic Food & Beverage ( PBJ), which tracks U.S. food and beverage companies, among them Pepsi, McDonald's, Starbucks ( SBUX), Mead Johnson Nutrition ( MJN) and YUM! Brands ( YUM). -- Written by Joe Mont in Boston. >To contact the writer of this article, click here: Joe Mont.