3 Blue Chip Stocks Selling at Bargain Prices

Consumer staples stocks have taken a bit of a beating this year, struggling even more than the rather sluggish performance of the broader market. But that beating may be good news, especially for blue chip staples with strong cash flows and a history of consistent dividends, like Coca-Cola Co. (KO), PepsiCo Inc. (PEP) and Procter & Gamble Co. (PG). Having recently fallen out of favor by investors, these stocks are now looking like bargains that are set to outperform, according to Barron’s.

As of the close of trading on Wednesday, the S&P 500 is up 2.2% since the start of the year, while the Consumer Staples Select Sector SPDR (XLP) is down 12.4%. As for the top three holdings in the XLP, Coca Cola is down 7.6%, PepsiCo is down 16.2%, and Procter & Gamble is down 19.3%. (To read more, see: Richly Valued Defensive Sectors May Be Offering Discounts.)

Earnings and Dividends

Far from being a warning sign that there’s something wrong with consumer staples, this “universal carnage is leaving opportunities,” according to CEO Jenny Van Leeuwen Harrington of Gilman Hill Asset Management. The prices of consumer staple stocks have been hit hard, but the underlying companies still have significant cash flows, are expected to grow earnings, and have a reputation for consistently raising their dividends.

Having earned just $0.29 per share last year, mostly due to a significant loss in the final quarter, the EPS consensus forecast for Coca-Cola this year is $2.11, and is expected to grow 7.6% to $2.27 for 2019, according to Nasdaq. PepsiCo’s EPS last year was $3.38 and is expected to increase to $5.69 by the end of this year and also grow 7.6% to $6.12 by the end of next year.

While Procter & Gamble’s earnings outlook is less inspiring, estimated to fall from last year’s $5.59 per share to $4.20 at the end of this fiscal year before rising to $4.47 by the end of next fiscal year, the company has consistently boosted its dividend payout for 62 straight years. The stock’s dividend yield is 3.94%, compared to 3.50% for Coca-Cola, 3.73% for PepsiCo, and just 2.97% for the XLP. (To read more, see: P&G’s Battered Stock Ready for 10% Rebound.)

Growth Factors

PepsiCo’s strength comes not just from its beverage products but also its snack business, such as its Frito-Lay division, which produces Lay’s potato chips, Doritos and other brand names. The snack business will offer solid growth as more people are eating on the go, and while health concerns are growing, people are much more concerned about sugar than salt, according to Morgan Stanley analyst Dara Mohsenian, as reported by Barron’s.

Those health concerns are also giving a boost to Coca-Cola’s Zero Sugar brand Coke product, and the company is pushing other healthier products as well. While not as diversified as PepsiCo., the company has been cutting costs by, for example, using more innovative packaging that uses a sleeker can design and smaller bottles.

Based on last year’s annual report, Procter & Gamble has plans to improve productivity by saving up to $10 billion through to the end of fiscal year 2021. The company plans to lower the cost of goods sold, as well as implement savings in the areas of marketing spending, trade and overhead spending.