Restock Your Portfolio With These Reliable Food Stocks
By Adam Fischbaum | January 06, 2017 |

My wife grew up in a largish Catholic family. It's no surprise that most of her childhood was spent in the back of their Oldsmobile station wagon shuttling to different local grocery stores (this was pre-wholesale club) to take advantage of various sale items advertised in newspaper ads and circulars. For consumer staples, price ALWAYS matters. The same holds true when buying the stocks of packaged goods companies.

At the bottom of the 2008 financial crisis, shell-shocked investors tiptoed back into equities via consumer staples stocks. The defensive nature of this sector and its dependable dividend streams made sense in uncertain times. But, like with all investor trends, the sector became crowded and expensive. Until now.

From its mid-year high, the Consumer Staples Select Sector SPDR ETF (NYSE: XLP), dropped nearly 10% before beginning a recovery in December. While the exchange traded fund basket approach is not a bad idea, especially with a discounted price and an attractive 2.5% dividend yield, there are better bargains available in individual names.

Consumer staple titan General Mills (NYSE: GIS) has pulled back nearly 15% from its recent high, pushing the dividend yield to near 3%, a 20% pickup in yield over the ETF strategy. With one of the most well-known product portfolios in the sector, that includes brands such as Cheerios, Pillsbury, Betty Crocker and Old El Paso, the company had an impressive 2016. Year-over-year revenue as of August 2016 totals $16 billion, cash flow from operations is nearly $1 billion year-to-date, and the company has produced half a billion dollars in free cash flow.

But while these numbers are strong as new rope, investors were disappointed with the company's most recent earnings report. EPS came in at 80 cents, an 8% decline from the same period last year. The company also predicted a 3% to 4% decline in organic sales.

The news wasn't all bad, though. Management raised the quarterly dividend 9% from 44 cents to 48 cents per share. Despite the softer sales outlook, General Mills can still use the power of its monster brands to generate equally monster cash. The recent pull back looks like a good opportunity for investors looking for a high quality, consumer staple name.

While General Mills has more of a bond-like, Steady Eddie quality, B&G Foods (NYSE: BGS) is a true growth story in the consumer staples space. The company has shrewdly grown its brand portfolio through acquiring old or brands at bargain prices and breathing new life into them through marketing and creative distribution channels as well as hunting for young brands to take to the next level. Using the leverage of names such as Emeril's, Cream of Wheat, and Ortega, B&G's most recent purchase, Pirate's Booty, has planted the company flag firmly in the lucrative snack category.

Net sales have grown at a steady 8.75% average annual clip over the last five years from $543 million to nearing the billion-dollar mark at $966 million. Equally impressive, cash flow from operations has grown at an annual rate of 15.5% over the same period. This has enabled the company to grow the dividend at 12% annually over the last five years from 86 cents per share to an attractive $1.38.

EPS growth is probably the weakest number in BGS's bag, with growth at 3.5% per annum over the same five-year period. However, keep in mind that the company is in a blatant growth mode focused on acquiring brands while still focusing on shareholder value through the dividend. The fact that there is EPS growth at all is a testament to management's ability.

Risks To Consider: The biggest macro risk facing the consumer staples sector is the big, bad specter of inflation. Input costs (commodities) have been relatively tame over the last few years allowing margin expansion. But the recent rate hike by the Fed and the promise of fiscal stimulation by the incoming Trump administration will only improve the chances of inflation growth turning margin expansion to margin compression relatively quickly.

Action To Take: Currently, GIS shares trade at around $62 with a forward P/E of 20 and a 3.1% dividend yield. BGS shares are priced at $43.90, a 17% discount from their 52-week high with a forward P/E of 18 and a 4.2% dividend yield. Conservative, long term investors have a great opportunity to add these two high-quality consumer staples stocks to their portfolios. Both have different yet complementary underlying fundamentals that provide purchasers steady, above average income with attractive, long-term upside.

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This article originally appeared on StreetAuthority.com: "It's Time To Stock Up On These Food Giants"