If the current earnings season is telling us anything, it’s that consumer staples stocks with durable demand look like a good place to be in 2024. The Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP) is an effective way to invest in this resilient sector of the market.
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I’m bullish on XLP based on the steady, defensive profiles of the blue-chip stocks that it holds at a time when consumer discretionary spending is challenged due to stubborn inflation that won’t go away and high interest rates, making XLP a port in the storm during a turbulent economic environment. I’m also bullish on XLP due to its favorable expense ratio and its solid dividend payout.
What Is the XLP ETF’s Strategy?
XLP invests in the consumer staples sector of the S&P 500 (SPX). According to the fund, it seeks “to provide precise exposure to companies from consumer staples distribution & retail; household products; food products; beverages; tobacco; and personal care products industries in the U.S.”
Consumer Staples Are Holding Steady
At a time when consumer discretionary stocks like Starbucks (NASDAQ:SBUX) are reporting disappointing results due to a challenged consumer, seemingly ho-hum consumer staples companies like Colgate-Palmolive (NYSE:CL) and Coca-Cola (NYSE:KO) (which are both top 10 holdings for XLP, as we’ll discuss below) are holding strong and weathering these issues.
This week, Starbucks reported declining same-store sales growth in the U.S. and internationally, as well as weaker-than-expected earnings and revenue. Management blamed the challenging environment for consumers, causing the stock to fall by a double-digit percentage.
CEO Laxman Narasimhan stated, “…We continue to feel the impact of a more cautious consumer, particularly with our more occasional customer, and a deteriorating economic outlook has weighed on customer traffic and impact felt broadly across the industry.”
From Narasimhan’s commentary, it seems clear that the average consumer in the U.S. is feeling the pinch of inflation and higher prices, and one way that they are tightening their purse strings is by cutting trips to places like Starbucks to buy discretionary treats like high-end coffees.
Even McDonald’s (NYSE:MCD), which isn’t typically thought of as a high-end dining option, said it found a difficult environment. McDonald’s CEO Chris Kempczinski said, “It is clear that broad-based consumer pressures persist around the world” and that “consumers continue to be even more discriminating with every dollar that they spend as they faced elevated prices in their day-to-day spending.” These issues resulted in McDonald’s same-store-sales growth coming in below Wall Street expectations and a bottom-line miss.
While discretionary spending on ‘everyday luxuries’ like trips to Starbucks or McDonald’s are a place where consumers are willing to tighten their belts, they will continue to buy everyday staples like household necessities, food, soda, cigarettes, and more from the types of companies that XLP invests in.
Someone who forgoes the daily trip to Starbucks will likely still drink a soda at home. People who smoke cigarettes buy them habitually and are unlikely to change this habit just because the economy is uncertain. These types of companies may not be the most exciting or glamorous, but demand for their products is steady and resilient, enabling them to hold up well during turbulent economic environments.
The results and commentary coming in from these consumer staples companies this earnings season backs this up.
Coca-Cola reported strong earnings results and said that while lower-income consumers are looking for value, “The U.S. consumer remains in good shape.” Coca-Cola also said there is a bit of a shift with “slightly more at home volume versus away from home (volume),” which also plays into this theme.
Meanwhile, Colgate-Palmolive, best known for boring but always-in-demand products like toothpaste and deodorant, also reported strong results and is seeing no challenges with the consumer. The company’s organic sales surged 9.8% year-over-year, and the company said, “Overall, we’re seeing… a balanced consumer” as prices stabilize.
XLP’s Sturdy Holdings
XLP holds 40 stocks, and its top 10 holdings make up 69.6% of the fund, so it is a bit concentrated. You can check out a table of XLP’s top 10 holdings below using TipRanks’ holdings tool.
XLP’s top holdings are chock full of the types of consumer staples stocks that have the durable demand to continue performing well in this type of environment. Top holding Procter & Gamble (NYSE:PG) and the aforementioned Colgate-Palmolive make products like toothpaste, deodorant, laundry detergent, dish detergent, and shampoo, which consumers simply aren’t going to cut from their budgets.
The aforementioned Coca-Cola and its archrival Pepsi (NASDAQ:PEP) are also top 10 holdings. Moreover, tobacco stocks like Philip Morris (NYSE:PM) and Altria (NYSE:MO), which enjoy consistent, habitual demand for their products, make a strong showing in XLP’s top 10 holdings.
XLP’s top 10 holdings collectively enjoy very strong Smart Scores. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or above is equivalent to an Outperform rating.
Seven of XLP’s top 10 holdings feature Outperform-equivalent Smart Scores of 8 or higher, while Costco (NASDAQ:COST), Coca-Cola, and Altria feature ‘Perfect 10’ Smart Scores, the highest rating possible.
XLP itself boasts an Outperform-equivalent ETF Smart Score of 8 out of 10.
XLP Has a Budget-Friendly Expense Ratio
Like the other broad sector SPDR ETFs, XLP charges an expense ratio of just 0.09%, making it a particularly cost-effective option for investors. This 0.09% expense ratio means that for every $10,000 invested, an investor will pay just $9 in fees annually, a very reasonable rate.
A Decent Dividend Yield
In addition to this low expense ratio, the ETF boosts its investment appeal with a decent dividend payout — XLP yields 2.8%. While this isn’t necessarily a massive payout, remember that it’s roughly double the yield of the S&P 500, which is just 1.4% right now.
Is XLP Stock a Buy, According to Analysts?
Turning to Wall Street, XLP earns a Moderate Buy consensus rating based on 23 Buys, 15 Holds, and two Sell ratings assigned in the past three months. The average XLP stock price target of $82.51 implies 9.1% upside potential.
A Port in the Storm
In conclusion, this earnings season shows that the consumer is clearly in a challenging economic environment. Forgoing discretionary purchases like a latte from Starbucks is one way that consumers can tighten their belts, leaving these types of companies in a difficult position for the time being.
On the other hand, consumer staples companies are in a position of strength. Whether they’re selling soda, groceries, toothpaste, detergent, or cigarettes, these are items that consumers view more as necessities and are going to be one of the last places they cut. Therefore, I’m bullish on XLP, given the resilient, consistent demand its holdings enjoy. This makes it a great place to hide out during this uncertain economic backdrop.
I’m also bullish based on its attractive expense ratio, above-average dividend yield, and the strong Smart Scores of the blue-chip stocks it counts as its top holdings.
