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Tuesday, 04/05/2022 1:19:34 AM

Tuesday, April 05, 2022 1:19:34 AM

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Costco, Dollar General - >>> 10 Dividend Paying Consumer Defensive Stocks

Insider Monkey

by Hamna Asim

April 4, 2022

The consumer defensive sector includes companies that work in the food, beverages, household products, packaging, and tobacco sectors. These are referred to as consumer staples, given people do not stop spending on these products even when their income is limited.

Valuations in most sectors remain above historical averages, but the consumer defensive sector has valuations that are neither particularly expensive nor too cheap. The consumer defensive sector can fare well through inflationary periods, since higher costs can be passed on to customers. However, there is intense competition among the sector, which leads to limited pricing power. Charles Schwab has a neutral view on the consumer defensive sector.

Restaurants and entertainment establishments opening post pandemic has led to strong demand for wholesale food, which has helped the consumer defensive sector stay afloat, despite the uncertain economic outlook given the Russia-Ukraine crisis, rising rates, and inflationary pressure.

Wells Fargo remains positive on household products and beverage subsectors in 2022, whereas its stance on packaged food is neutral. According to the firm, packaged food can make a strong comeback if it focuses on healthier food choices, in line with customers’ demand. However, this change in strategy will take time to play out.

Some of the most notable consumer defensive stocks include The Coca-Cola Company (NYSE:KO), Kellogg Company (NYSE:K), and Walmart Inc. (NYSE:WMT), in addition to others discussed in detail below.

Our Methodology

We selected consumer defensive stocks that have a rich dividend history and have received positive analyst ratings as of late. Data from 900+ elite hedge funds tracked by Insider Monkey at the end of December 2021 was used to identify the number of hedge funds that hold stakes in each firm.

Dividend Paying Consumer Defensive Stocks

Costco Wholesale Corporation (NASDAQ:COST)

Dividend Yield as of April 1: 0.55%

Number of Hedge Fund Holders: 57

Costco Wholesale Corporation (NASDAQ:COST) is an American merchandise retailer that sells sundries, dry groceries, liquor, electronics, health and beauty products, and hardware, among others. The company has presence in the United States, Canada, Mexico, the United Kingdom, Japan, South Korea, Taiwan, Australia, Spain, France, Iceland, and China.

On March 30, Oppenheimer analyst Rupesh Parikh maintained an Outperform rating on Costco Wholesale Corporation (NASDAQ:COST) and raised the price target on the shares to $620 from $580. The analyst overall believes that Costco Wholesale Corporation (NASDAQ:COST)’s short- and long-term prospects are positive. The company's business model is extremely well-positioned for the current macro environment, Parikh added.

Costco Wholesale Corporation (NASDAQ:COST) declared on January 20 a $0.79 per share quarterly dividend, in line with previous. The dividend was distributed on February 18, to shareholders of the company as of February 4. The company delivers a dividend yield of 0.55% as of April 1. Costco Wholesale Corporation (NASDAQ:COST) has increased its dividends consistently for the last 18 years.

According to the fourth quarter database of Insider Monkey, 57 hedge funds were bullish on Costco Wholesale Corporation (NASDAQ:COST), compared to 55 funds in the prior quarter. Fisher Asset Management held the biggest stake in the company, with more than 4 million shares worth $2.3 billion.

In addition to The Coca-Cola Company (NYSE:KO), Kellogg Company (NYSE:K), and Walmart Inc. (NYSE:WMT), Costco Wholesale Corporation (NASDAQ:COST) is a notable dividend paying consumer defensive name.

Here is what Ensemble Capital has to say about Costco Wholesale Corporation (NASDAQ:COST) in its Q1 2021 investor letter:

“We saw these dynamics at play in the Fund. Some of the worst-performing stocks this quarter were among our best performers in Q1 2020. Another example was the market’s reaction to Costco Wholesale (1.5% weight in the Fund) during the quarter. From December 31, 2020 to March 8th, Costco shares declined 17% and dropped below their pre-pandemic high. The common rationale offered by sell-side analysts was that Costco would face difficult one-year “comps” (i.e. same-store sales, which compare sales from stores open for at least a year). Because so many consumers rushed to Costco ahead of shelter-in-place and subsequent quarantines, it will be harder for Costco to meaningfully beat those results when compared year-over-year. That may indeed be true, but we struggle to understand how Costco could be “less valuable” than it was a year earlier when it concurrently increased its membership base by over 7%, or 3.9 million members. With membership renewal rates around 90%, the vast majority of the new customers Costco brought in last year will be around for years to come.

Analysts also complained about Costco raising its already industry-leading minimum wage to $16/hour, with an average “effective” pay of $23-$24/hour when you include overtime and bonuses. Costco paying its employees “too much” has been a common gripe of Wall Street analysts for at least two decades. While the extra pay does indeed impact short-term profit margins, it also serves to make Costco more durable, as its flywheel (i.e. a virtuous value cycle) starts with happy employees. A 20-year chart of Costco stock price is evidence that this strategy works and we’re confident that it will continue to work.”

Dollar General Corporation (NYSE:DG)

Dividend Yield as of April 1: 0.97%

Number of Hedge Fund Holders: 44

Dollar General Corporation (NYSE:DG) is an American retailer that operates a network of discount stores across the United States, selling clothing, cleaning supplies, home décor, health and beauty aids, pet supplies, toys, seasonal items, and groceries. The stock delivers a dividend yield of 0.97% as of April 1.

On March 17, Dollar General Corporation (NYSE:DG) declared a quarterly dividend of $0.55 per share, a 31% increase from its prior dividend of $0.42. The dividend will be paid on April 19, to shareholders of record on April 5.

BMO Capital analyst Kelly Bania on March 18 kept an Outperform recommendation on Dollar General Corporation (NYSE:DG) and lifted the price target on the stock to $265 from $250. According to the analyst, Dollar General Corporation (NYSE:DG)’s Q4 results were "solid" despite the "transitory" gross margin pressures. She sees a possibility for the company to return to its 10% EPS CAGR from present levels.

Among the hedge funds tracked by Insider Monkey, 44 funds reported owning stakes in Dollar General Corporation (NYSE:DG) at the end of December 2021, collectively worth $2.20 billion. Tim Hurd and Ed Magnus’ BlueSpruce Investments is the leading shareholder of the company, with 2.70 million shares worth roughly $637 million.

Here is what LRT Capital Management has to say about Dollar General Corporation (NYSE:DG) in its Q3 2021 investor letter:

“Executive Summary

At LRT Capital Management we are continuously searching the market for great investment opportunities. Our favorite finds are companies with moats and growth opportunities that justify a higher price than what the stock is trading for. One of our holdings (approximately 1.5% of our long exposure) is Dollar General (DG), so today, we wanted to tell you a bit about this great company.

Company Overview

Dollar General is a discount retailer with the largest brick-and-mortar presence in the United States by store count. The company’s largest concentration of stores can be found in the southern, southwestern, midwestern, and eastern parts of the United States.10 Dollar General was founded in 1939 by J.L. Turner, who originally named the company “J.L. Turner and Son, Wholesale”. As the name suggests, the company began its life as a wholesaler, but quickly turned to a retailer of general store goods. By the early 1950s, the company had annual sales of $2 million per year, which is the equivalent of $22.95 million in 2021 dollars when adjusted for inflation.

The first Dollar General store opened on June 1st, 1955 in Springfield Kentucky. The simple concept was that no item in the store would cost more than one dollar. The company changed its name to Dollar General Corporation in 1968 when Dollar General became publicly traded. At the time of its initial public offering, the business generated more than $40 million in annual sales. The company’s common stock was publicly traded from 1968 until July 2007, when it was taken private by KKR. The company went public again in November 2009, under the ticker DG.

Today, Dollar General is an evolved, and phenomenal business with more room for growth. Annual sales reached a record $33.7 billion in fiscal year 2021 after consecutively growing the top line for many years. The company’s main products are every-day necessities and consumables purchased by lower income consumers on tight budgets…”