Weren’t we told stocks of consumer staples should be cornerstones of every mindfully assembled portfolio? With their defensive business models, predictable demand (one needs to eat, drink, clean, etc.), strong brands, consistent dividends and long histories as proof of being in business for a reason, this sounds like a no-brainer. Winning by not losing, everything else is too speculative, isn’t it? However, over the last five and even ten years, exactly this group of stocks has disappointed extremely. Many are in the red and even factoring in their dividends the performance was abysmal. Are valuations now cheap enough to take a bite?

Summary and key takeaways from today’s Weekly
– Food stocks are very popular especially among retail investors who want to own more defensive and stabilizing pieces in their portfolios.
– Looking at the last five, but especially ten years, this couldn’t be further from the truth – this is self-deception at its best, stripping such investors of precious time where they do not compound.
– I explain the likely reasons and answer why I am still not interested in these stocks.

Despite actually being more a boring topic, I was triggered to take a look at and write about the more defensive side of consumer stocks. I see a clear urgency to clean up with a few misleading aspects and shine a light where most don’t – despite or especially because the truth is painful. In the past, I had already written among others about exactly this sector, expecting it to suffer (see here or here).

I was proven right.

Not only are many especially inexperienced retail investors constantly writing about them on Twitter, but also perceived pros with several-thousand followers relentlessly continue to promote stocks of this sector as must-haves and great buying opportunities as if this were the secret sauce (you will see, more like ketchup from rotten tomatoes).

Skeptics like me were not taken seriously, when we have written or said in interviews for long that these stocks weren’t worth it. Minimal upside with high valuation risk in mostly saturated markets simply didn’t add up to strike (many still don’t get it that even perceived defensive stocks can have a huge valuation risk – just look what the stock of Coca-Cola did post 1998).

Counter arguments are known.

One must invest for the long-term and not be so myopic, dividends pay for waiting, these companies have endured through significant crises, their brands are strong and give them pricing power, the demand is safe and predictable, etc. How come the majority of these stocks, especially the big household names and retail crowd’s favorites have become such losers?

I don’t know about you, but for me this is self-deception, not investing for the long-term. Even quite to the contrary, you are giving up precious time which cannot be used to compound your portfolio – opportunity costs. Numbers don’t lie.

As there are many stocks in this sector as a whole and one can divide the sector further into smaller groups, I decided to split this entire topic into several Weeklies. I am starting with food stocks (respectively, those that are perceived as such).

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Bites too big to swallow

I am fully aware that I will disappoint or even frustrate one or the other by seemingly bashing stocks many investors love and hold in their portfolios.

But honestly, for me this is not even bashing.

How I am seeing this whole exercise is I am evaluating dry numbers and facts, put them together and draw a conclusion. Just as easy and unemotionally as that. Which doesn’t mean I won’t be wrong occasionally – that’s part of it. But sometimes a wakeup call is unpleasant.

Some things are simply too obvious, though.

For example, had you followed me closer on my warnings about coming dividend cuts which were not hard to anticipate (when free cash flow wasn’t sufficient to cover the payout), you wouldn’t be surprised that highly-perceived dividend aristocrats or even kings had to do the unthinkable – slash slash.

What I am NOT doing is to engage in “buy and hope and pray hold” by building my investment thesis solely on the past performance of a stock, just assuming what happened in the past will continue (and how often a stock is discussed on social media). I have written already a few lines about these and related topics (see here, here or here).

We all know the arguments for why defensive food stocks are loved.

Companies that come to my mind are among others:

• Nestlé (ISIN: CH0038863350, Ticker: NESN)
• Danone (ISIN: FR0000120644, Ticker: BN)
• Kraft Heinz (ISIN: US5007541064, Ticker: KHC)
• General Mills (ISIN: US3703341046, Ticker: GIS)
• J.M. Smucker (ISIN: US8326964058, Ticker: SJM)
• The Campbell’s Company (formerly Campbell Soup; ISIN: US1344291091, Ticker: CPB)
• Conagra Brands (ISIN: US2058871029, Ticker: CAG)

I know there are quite a few other names like Unilever (ISIN: GB00B10RZP78, Ticker. ULVR).

But I picked this group as they are primarily involved in junk predominately processed food production and selling, unlike others who also have household or personal care stuff that I didn’t want to mix in. Nestlé, General Mills and Smucker have pet food segments which I didn’t want to differentiate further in times of “fur babies” often being seen as child replacements.

How could I make my point clearer than by just showing the five- and ten-year charts?

^{source: all TIKR}

Without doing too much lifting at this stage, I have difficulties in spotting bull markets or successful investments, not to mention any form of wealth creation via compounding with these “defensive, must-have” stocks.

The more so over the “long-term” which is so frequently used as a tool of deception to not have to admit a mistake motivation.

After plenty of charts, I took the individual numbers and put them into a table for a better overview before processing further.

These are the numbers without dividends, just stock price performances.

company	5-year stock performance	10-year stock performance
Nestlé	–18.4%	+5.6%
Danone	+14.6%	+7.2%
Kraft Heinz	+21.4%	–61.7%
General Mills	+11.7%	+10.6%
J.M. Smucker	–3.6%	–8.6%
Campbell’s	–21.2%	–17.1%
Conagra	–8.9%	–28.5%

There are two things we should keep in mind.

The 2020-crash is now almost exactly five years old and many stocks were already in free-fall. This results in the performance numbers being a bit too good in some cases, despite in general being weak, nonetheless.

I obviously have left out the dividends. But if a stock like Kraft Heinz is down by 62% over ten years, does this really make a difference? It even cut its dividend in between.

While it is true that part of the total return is the dividend, it is also true that many people bought these stocks not at today’s dividend yields, but at much lower ones (higher stock prices and at lower payouts per share).

And honestly, even today some dividends are not attractive for my taste, but more on that later.

Anyway, I consider the ten-year period to be a good starting point as investors in these stocks typically focus on what they consider to be the long-term.

The worst performer is the already mentioned Kraft Heinz – a company that was celebrated because Warren Buffett was and still is heavily involved in it. I’m not aware of any other reason. The company already then had legacy brands, abysmal growth prospects and an extremely over-levered balance sheet with on top very volatile cash flow generation (aren’t stable cash flows one of the main arguments for food stocks?).

But it confirms my stance not to follow Buffett too much and certainly not to try to copy him (see here and here).

The best performer over the last ten years is the stock of General Mills with +10.6%.

To avoid any potential confusion: not per year, but in total (pre-dividend).

This is akin to a yearly compounded performance of 1%. And this is the BEST performer of this group of well-known names. Certainly not what I am personally expecting to achieve “over the long-term”.

The dividend yield of General Mills is now 4%, but it was substantially lower in the past after the company conducted a debt-fueled acquisition of the pet food brand Blue Buffalo (which by the way was a good move as this is today one of the best performing and highest-margin segments of GIS, despite the high price tag then of more than a 30x PE).

Another argument is that these types of stocks, defensive consumer staples or food stocks, are less volatile, offering more stability and calming down nerves of stressed gamblers who don’t know what they’re doing investors while many other business models or sectors are either cyclical or have uncertain outcomes.

I did another table to check that. The numbers refer to the ten-year charts each.

company	max drawdown (measured by eye)	timeframe
Nestlé	125 CHF –> 75 CHF (–40%)	since 2022
Danone	80 EUR –> 50 EUR (–37%)	2019–2023
Kraft Heinz	100 USD –> 25 USD (–75%)	since 2017
General Mills	75 USD –> 40 USD (–47%)	2016–2019
J.M. Smucker	150 USD –> 100 USD (–33%)	2017–2019 and since 2023
Campbell’s	80 USD –> 35 USD (–57%)	2016–2019
Conagra	50 USD –> 20 USD (–60%)	2017–2019

Drawdowns of between a third and up to 75% (!) are not what I’d typically expect from so called high-quality core pillar-investments for my stock portfolio.

Some even have experienced or are currently experiencing their second wave down.

As if this weren’t bad enough:

• this happened over many years and in times where the overall market was going up, even strongly. Not sideways or crashing
• many drops occurred during times of low interest rates which actually support equities
• overall the charts look like roller-coaster rides, not like of slow, but stable performers
• many of theses stocks are even trending to or already lying near their decade-lows – while indices are at or close to all-time highs (even though dominated by the tech sector, but many other stocks from different sectors are at or close to their highs, too)

Not to mention the briefly named opportunity costs, meaning the gains one did not make by holding on these losers. This has crippled compounding.

Imagine ten years being taken away from you where compounding was missed! Remember all those charts where it is shown that Buffett made by far the majority of his fortune after he was 60 years?

Having or not having ten years is almost unimaginably plenty.

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I have no other words for that.

What has caused these dire performances?

As we have seen, it is not just one or maybe two outliers where management did something wrong. Several well-known names have been lagging (quite an understatement) the broader market.

Were it only for lagging, it’d be okay with it.

Consumer staples are not rockets. It is not much growth that is expected, but much stability and reliable dividends. While in most cases the dividends kept on flowing or were even raised, this doesn’t offer an acceptable excuse. Especially, as payout ratios have risen (making further increases more difficult or rather symbolic only) and the increases did not necessarily keep pace with inflation.

The root cause needs to be addressed.

Trying the best I can to look at the sector from a bird’s eye view, I came to the conclusion that there is not just one single cause. There’s a myriad of problems even.

• inflation and costs
• consumer’s changing preferences
• the brand appeal
• demographics
• debt on the balance sheets

Without making it too long, maybe you just check the following with your personal consumption behavior (or observe others). Not everything will fit exactly, but I think the overall trend is clear.

Inflation is a rather more modern phenomenon, respectively occurrence, as the majority of today’s investors has never experienced high inflation rates of above 5%, not to mention 10% in their lifetimes. This refers to Western economies.

Obviously, supply disruptions and rising commodity prices resulted in much higher end product prices. Usually, one would assume that due to their strong brands and offering products of daily use, these companies would be able to pass the cost increase to their consumers. No one would eat a third less due to higher costs.

But that is not the case.

If lucky, these companies were able to keep their sales stable. Massive price hikes met financially strangled consumers who were looking to make it till the next paycheck. That’s why you will often see either one or several of these phenomena:

• higher reported sales, but also higher costs, pressuring margins and not resulting in higher earnings or only below sales growth
• higher prices, but lower volumes sold, resulting in not meaningfully higher sales when measured against inflation rates. In the worst case even causing diseconomies of scale, i.e. less volume increases fixed costs

Let’s take a look at Nestlé, the biggest such food concern.

Below, we can see that over the last ten years neither sales nor operating margins moved. In real terms, this is a loss. Despite all the celebrated acquisitions, disposals, optimizations, efficiency-raising efforts, etc.

Much effort without results.

Next, the development of gross margins (products sales minus costs) as well as operating margins. It looks like both a trending sideways again. If we look closer, we see that gross margins have been going down while operating margins are slightly up.

The former indicates that costs can NOT be passed entirely to consumers, while the slightly higher operating margin is the result of cost savings and I guess a bit less marketing spend.

But all in all, absolutely no signs of growth.

You can make this exercise for the other companies, too.

It is always the same. Barely any growth and only a few movements on a very granular level, if any. But the story of the past, i.e. solid compounders, is simply over.

Coming back to consumer preferences, I already 5–6 years ago had the thesis that these brands are overvalued and not as strong as many thought. While there will always be people who only or predominately buy premium brands, nowadays there are so many known premium and unknown white label brands offering practically the same products, that this higher competition leads to pricing pressure.

Stores and supermarkets further have a higher interest in promoting their own white-label products as they are higher-margin for them.

If you think that the food giants have the better bargaining power, I must disappoint you. Although these are only examples from Germany below, they clearly show that the big markets have the upper hand. If price hikes are perceived to be too excessive to be passed on to consumers, products or even entire brands are thrown out the shelves and replaced with own white-label alternatives.

Or they come back, accepting less than initially targeted.

Here are two more sources (here and here).

If prices rise too much, volumes flush – if the affected products remain in shelves at all. Supermarkets and consumers are not stupid.

Take Heinz ketchup, Danone yogurts, Smucker jam, etc. Who cares about them when speaking from a big-picture? These are entirely exchangeable brands where price more often than not has become the more important buying factor. Again, not for a few selected people, but for the majority of average-Joe consumers.

Thus it is not a surprise to occasionally see asset write-downs – the brands are not as valuable as thought or as accounted for.

Though the Kraft Heinz example is from 2019 and a bit extreme, it shows what is possible. Not too long ago, this would be unthinkable.

It should better be expected.

To give you a personal example: Do you think I am eating chocolate from Mars or Lindt? Both names do not really fit into today’s Weekly from the stock-analysis perspective as the former is held privately and the latter’s shares have thrived.

Then, we obviously have reached a level of high saturation.

People unlikely will eat more to increase volumes. To the contrary, given our increasingly sedentary lifestyles, we should even eat less, respectively move more which is hard to achieve in most of our daily routines. This is not a strong argument in favor of consuming even more processed food.

With this, my last point: debt and the balance sheets.

As financial debt is part of the enterprise value, it should not be shocking that more levered balance sheets result in lower, depressed equity prices. Especially, as we’ve left the (near-) zero interest rate environment, making the cost of debt more expensive when refinanced. This pressures the bottom line and cash flows.

To not make it too confusing in one chart, I am showing all net debt to EBITDA charts.

^{source: all TIKR}

The range is between 2x for Danone at the lower end to over 4x for Nestlé and Smucker, with the average being somewhere around 3x. Some companies have started to delever, Nesté and Smucker are going full steam ahead in the wrong direction.

This is rather typical and nothing extremely shocking. The only exceptions are Nestlé and Smucker being that aggressively leveraged. But in an environment where growth is hard to achieve, cost saving having a limited effect (you can only squeeze the lemon for so long) and more competition with changing consumer’s preferences, it is indeed no wonder and well deserved even that these stocks have performed like they did.

The market in the long run doesn’t lie.

One last chart, the sales developments of them all in one chart. Almost flat lines over the last ten years. A few percentage points up or down is irrelevant.

With so much negativity from my side and at times hard-fallen stock prices, the obvious question is now, maybe that’s the low?

Is it?

I don’t know, but we can look at a few metrics to get a better feeling for how these stock are priced.

company	EV / FCF	Dividend yield
Nestlé	26x	3.7%
Danone	22.5x	3.3%
Kraft Heinz	15x	5.5%
General Mills	16x	4.3%
J.M. Smucker	19x	4.4%
Campbell’s	18x	4.1%
Conagra	17x	5.9%

With enterprise values (market cap + net financial debt) to free cash flows of between 15x to even 26x, I am having difficulties in finding any bargains, well knowing that I cannot expect any growth. Even if we assume some 3–5% in a mix of share buybacks and some miraculous cost savings initiates – that is simply not enough to justify such valuation multiples.

The dividend yields aren’t attractive either. The highest yielding are Kraft Heinz and Conagra. Both have recently issued very weak outlooks.

Many won’t like to hear that. But the once bullet-proof business models don’t work anymore.

These companies will continues to exist – in one form or the other (mergers possible), but what worked in the past, clearly does not have to do so in the present, respectively in the future.

With this, it won’t be surprising that I haven’t found any suitable idea here.

Conclusion

Food stocks are very popular especially among retail investors who want to own more defensive and stabilizing pieces in their portfolios.

Looking at the last five, but especially ten years, this couldn’t be further from the truth – this is self-deception at its best, stripping such investors of precious time where they do not compound.

I explain the likely reasons and answer why I am still not interested in these stocks.

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