During periods of heightened volatility, consumer staples stocks often gain in popularity. Why? Because these companies often continue to chug along nicely with limited impact from macroeconomic factors.
Let’s take a closer look at how the consumer staples sector operates, the advantages of investing in this space, and the risks that come with it.
What are consumer staples stocks?
Consumer staples stocks operate at the heart of everyone’s everyday life. So, it’s no shock that the London Stock Exchange houses plenty of companies in this stock market sector. As a reminder, these are the businesses that provide essential products needed to live.
Consumer staples products include:
Top consumer staples stocks in the UK
Here are some of the top UK consumer staples stocks by market cap.
|Unilever Plc (LSE:ULVR)||One of the larger consumer staples retailers in the world offering food, personal care, and home care products|
|Diageo Plc (LSE:DGE)||A leading alcoholic beverage producer whose products can be found in over 180 countries worldwide|
|British American Tobacco Plc (LSE:BATS)||One of the largest cigarette companies in the world, offering a wide range of tobacco-based products|
|Reckitt Benckiser Group Plc (LSE:RKT)||Offers a wide range of hygiene and consumer healthcare products that can be found in most supermarkets globally|
|Tesco (LSE:TSCO)||The UK’s largest supermarket chain selling a wide variety of consumer staples and discretionary items|
Unilever is a fast-moving consumer goods company that offers food, personal care, and home care products. Since being established in 1894, the firm has expanded into one of the largest branded consumer staples businesses within the UK.
Its products can be found in almost all major supermarkets and include items such as Hellmann’s mayonnaise, Ben & Jerries ice cream, Dove shampoo, Peril washing-up liquid, and Cif surface cleaner, among hundreds of other brands.
Diageo is a leading alcoholic beverage company founded in 1886. The group owns and operates various distilleries around the world that produce a wide range of drinks, including scotch, whisky, gin, vodka, rum, beer, liqueur, tequila, and others.
Its portfolio of products can be found in most supermarkets and liquor stores in over 180 countries. Its top-tier brands include Johnnie Walker, Crown Royal, Smirnoff, Captain Morgan, Baileys, and Guinness.
British American Tobacco
British American Tobacco is the third-largest cigarette company in the world. Based in London, the company manufactures and sells a wide range of tobacco-based products, including combustible tobacco, loose tobacco, and oral nicotine.
With healthcare scrutiny of its industry rising, management has been ramping up internal investments into less harmful product lines, namely electronic cigarettes and heated tobacco. Today, it hosts a wide portfolio of brands, including Dunhill, Kent, Pall Mall, and Rothmans, among others.
Reckitt Benckiser Group
Reckitt Benckiser is a global consumer goods enterprise targeting the hygiene, consumer healthcare, and nutrition market sectors. It’s worth noting that the majority of its brands are found in the first two areas, which are typically underserved by its competitors like Unilever.
Its products can be found in supermarkets worldwide, including brands such as Air Wick, Finish, Woolite, Clearasil, Durex, and Veet.
Tesco is the largest supermarket chain in the UK, with 3,478 stores in its real estate portfolio. Its immense network of convenience and super stores make it the most popular shopping destination for many households, granting the company the largest portion of market share versus competitors.
The retailer predominantly sells consumer staples items. However, the larger shops sell house discretionary items as well. The company also operates a network of low-cost petrol stations and provides financial services through its Tesco Bank, including insurance and credit cards.
Qualities of consumer staples shares
Because of the constant demand for these products, consumer staples stocks are remarkably resistant to recessionary environments, even during economic turmoil. This is the opposite of what usually happens to the sector’s counterpart, consumer discretionary stocks.
These businesses are typically mature, well-established enterprises that don’t offer much excitement in terms of growth. As such, during bull markets, these firms typically underperform.
However, the non-cyclical nature of this sector, paired with high cash flow reliability, enables most to offer hefty slowly-expanding dividends. So, it’s no surprise that investors can find plenty of consumer staples shares on the list of UK dividend aristocrats.
What’s more, branded consumer staples goods often retain a high degree of customer loyalty (although there are limits). As such, the pressure from inflation and rising labour costs can often be passed onto consumers, protecting margins, earnings, and shareholder payouts.
This consistency makes the sector a popular destination for defensive passive income investors. Even more so during bear markets when it’s historically outperformed the stock market.
Risks of investing in consumer staples stocks
Buying consumer staples stocks is the same process as any other type of equity investment. However, it’s important to understand that not all consumer staples companies are the same. Each has its own unique set of threats and hurdles to overcome.
Looking at the highlighted businesses above:
- Unilever and Reckitt Benckiser Group have to manage price hikes effectively to prevent scaring customers into the arms of competing premium or cheaper brands.
- Diageo and British American Tobacco are constantly under pressure from regulators due to the risk their products pose to consumer health.
- Tesco needs to expertly manage its inventory to ensure its items are constantly being shifted, especially concerning perishable goods.
The risks to each category of consumer staples stocks are unique. However, the exposure to these risks within an investment portfolio can be mitigated through diversification.
Similarly, several consumer staples exchange-traded funds (ETFs) are available to buy, which makes this diversification process far simpler for those not seeking to buy individual stocks.
Should you invest in consumer staples stocks?
Focusing solely on investing in consumer staples stocks is a proven method of protecting wealth within the stock market. However, this sector rarely provides any meaningful growth, making it usually unsuitable for individuals with a more aggressive investment strategy.
Having said that, left alone for long periods of time, consumer staples stocks can provide some element of wealth-building through their impressive dividend policies.
Deciding whether to focus on these defensive shares rather than more aggressive investment opportunities is a highly personal decision. But these categories aren’t mutually exclusive. In other words, nothing is stopping an investor from introducing consumer staples stocks into their portfolio alongside growthier positions.