Since the start of 2023, the big story on Wall Street has been technology. The boring consumer staples sector has lagged far behind both the tech sector and the broader S&P 500 index (SNPINDEX: ^GSPC) over the past three to five years. Since the start of 2024, however, there's been a shift in the mood on Wall Street, with investors moving back toward boring, conservative investment choices. That's boosted consumer staples companies across the board.
However, there are two Dividend Kings that are still trailing their peers and, potentially, offering long-term dividend investors a lot of opportunity.
What's so special about consumer staples stocks?
Technology stocks are largely a growth story, with the hot theme right now being artificial intelligence (AI). That's all well and good, but hot investment themes generally lead to extended valuations. And when investors turn cautious, those valuations can compress quite quickly. It looks like that is what has happened over the past month or so, with a steep drop in the technology sector dragging the S&P 500 index lower.
During periods like this, investors often shift toward more conservative investments, like stocks in the consumer staples sector. Consumer staples are, basically, products that people buy on a regular basis even if the economy has fallen into a recession. Think toilet paper, toothpaste, and food. You might be able to put off the purchase of Apple's next iPhone, but you can't stop buying Procter & Gamble's bathroom tissue, Unilever's toothpaste, or General Mills' soups and cereals.
Basically, the consumer staples sector is filled with reliable and slow-growing companies. Two that are worth looking at right now are Dividend Kings PepsiCo(NASDAQ: PEP) and Hormel Foods(NYSE: HRL). Both have lagged behind the broader consumer staples space and offer historically high dividend yields today.
What's wrong with PepsiCo?
From a business perspective, there's nothing wrong with PepsiCo. It managed to grow organic sales by 2% in 2024 and adjusted earnings increased by 9%. Those are solid numbers in the consumer staples space. Looking out to 2025, management projects low single-digit organic sales growth and mid-single-digit adjusted earnings growth, also solid numbers.
But 2024 and 2025 are both slower than what PepsiCo achieved when it was able to push through large price increases thanks to the inflation coming out of the worst parts of the coronavirus pandemic. The slowdown led some investors to abandon the company's stock, which still trades off by around 20% from its most recent peak. It also offers a historically high 3.5% dividend yield.
That suggests you still have an opportunity to buy a very well-run and diversified business (with operations in beverages, snacks, and packaged foods) at an attractive price. Even the most conservative investors should feel comfortable owning PepsiCo, noting that the dividend has been increased annually for a huge 52 years and counting.
Hormel is a different story because it faces some material issues. Notably, the food maker had a fairly weak fiscal 2024 and its first quarter in fiscal 2025 was mixed, with organic sales up 1% but adjusted earnings lower by 11%. This is basically a continuation of a trend for the food maker, which wasn't able to push through price increases as quickly as peers, has been facing headwinds from avian flu, is being impacted by a slow recovery in China, and has faced production issues in its recently acquired Planters business.
Hormel is a bit of a turnaround play at this point, but management is doing what it can. And it remains confident enough in its long-term future that it keeps increasing its dividend each year. The streak is now up to 59 consecutive years. That said, the company's relatively weak financial performance has investors seriously downbeat on the stock, which has lost 40% of its value over the past three years. That's pushed the dividend yield up to a historically high 3.8%.
Management isn't sitting still, however, and it has a strong backstop in the form of The Hormel Foundation, which controls around 47% of the voting rights at the company. In other words, Hormel has the leeway to make long-term decisions instead of rushing to appease Wall Street, the latter of which could lead to short-term fixes that don't solve long-term problems. If you think in decades and not days and can handle investing in a contrarian manner, Hormel might be a good stock for your portfolio.
I like underdogs and contrarian ideas
If you are like me, you don't mind stepping into areas that others avoid. I believe that's where you find the best values, though sometimes Wall Street even puts pretty good companies in the doghouse. That's the case today with PepsiCo, which isn't doing badly as a business despite what the stock price decline might indicate. Hormel is a bit more difficult to sell, given that it has been dealing with material headwinds for a while now. However, the Dividend King has a long history of success, and The Hormel Foundation gives it the leeway to adjust its business in ways that other companies can't.
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Reuben Gregg Brewer has positions in General Mills, Hormel Foods, PepsiCo, Procter & Gamble, and Unilever. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends Unilever. The Motley Fool has a disclosure policy.
