Are these the best consumer staples stocks to watch?

Consumer staples stocks are shares in companies which specialise in selling daily essentials — food and drink, hygiene and household products, cosmetics, alcohol and tobacco. These stocks are classified as ‘defensive’ — consumers will continue to buy them regardless of the state of the economy — meaning the companies benefit from inelasticity of demand.

These are non-cyclical businesses, which means sales, revenue and at least some profit is generally expected. However, consumer staples stocks are unlikely to make headlines for capital growth or explosive revenue increases.

Instead, they offer low price volatility, dividends, and defensive positioning within a wider portfolio. And a key trade-off is that consumer staples companies can be better able to pass on inflation-matching cost increases to customers — this is a huge advantage in inflationary periods which is becoming more apparent.

Given the perceived lower risk, lower return, consumer staples stocks are often popular with investors closer to retirement, or else investors starting to venture outside the diversification offered by ETFs.

Perhaps a core advantage that is often ignored is the heritage and branding power of most larger consumer staples companies. Many have been in operation for decades or more due to the defensive nature of the sector, and this can have a positive ongoing effect on investment attractiveness.

Of course, past performance is not an indicator of future returns.

Top consumer staples stocks to watch

The following five shares are the largest FTSE 100 consumer staples stocks by market capitalisation. There is an element of subjectivity to inclusion as there is no standardised ‘consumer staples’ definition.

1. Unilever
2. Diageo
3. British American Tobacco
4. Reckitt Benckiser
5. Haleon

Unilever

Unilever is a well-known transnational consumer staples business which produces a dizzying array of products including food, drinks, cleaning agents, beauty and personal care products. Some of its well-known brands include Dove, Ben & Jerry’s, Cornetto, Domestos and Hellmann's.

In its first quarter trading update, Unilever posted underlying sales growth of 4.4%, with volume growth up 2.2%. After currency fluctuations, total turnover was up 1.4% to €15.0 billion. All five of Unilever's divisions saw sales growth, boosted by its so-called 'power brands', such as Knorr and Magnum, with sales in Beauty and Wellbeing up 3.1% to €3.2 billion. The company is separating out its ice cream business from the rest of Unilever and planning a productivity programme. Meanwhile, management left forecasts for the full year unchanged and expects underlying sales growth of 3% to 5%.

"Unilever’s transformation is at an early stage, but we have increasing confidence in our ability to deliver sustained volume growth and positive mix as we accelerate gross margin expansion, " chief executive Hein Schumacher told investors.

The shares have remained almost flat over the past five years, with some investors arguing it has underperformed the wider market. However, it is in the midst of a turnaround plan; Schumacher took the reins in July 2023 noting that it is not "reaching its potential" and that productivity and returns have "under-delivered."

Diageo

While some consider alcohol not to be a consumer staple, it is a consumer product that people tend to buy regardless of the wider economic climate. Diageo is one of the largest alcoholic drinks manufacturers in the world, and controls a premium brand portfolio covering Johnnie Walker, Guinness, Smirnoff, Baileys, Captain Morgan, Tanqueray and Gordon's.

In recent interim results, CEO Debra Crew did note that "the first half of fiscal 24 was challenging for Diageo and our sector, particularly as we lapped strong growth in the prior year… looking ahead to the second half of fiscal 24, despite continued global economic volatility, we expect to deliver improvement in organic net sales and organic operating profit growth at the group level."

For context, an unfavourable foreign exchange market and the declines in Latin America and the Caribbean saw net sales decline by 1.4% to $11 billion. Accordingly, operating profit fell by 11.1% to $3.3 billion — though this fall was just $205 million when excluding the LAC region.

In more bad news, the stock has fallen to its lowest level in four years as news of China’s ‘anti-dumping’ investigation into brandy from the EU heats up.

British American Tobacco

Debate it if you must, but tobacco is also commonly thought of as a consumer staple. Smokers and vapers typically buy their favourite product — with the addictive component of nicotine an ethical question for individual investors to consider.

British American Tobacco is one of the world’s biggest tobacco companies, with a significant brand portfolio of famous names. However, the business is dealing with changing consumer preferences and government intervention. It wrote off circa £25 billion in value of its US-based cigarette portfolio in December 2023 — while the UK is planning to implement a ban on disposable vapes soon.

For context, revenue fell by 1.3% in full-year results (though rose by 3.1% at constant rates). ‘New category’ revenue grew by 21% — and revenue from non-combustibles now makes up 16.5% of the group’s overall revenue. Best of all, new categories achieved profitability in 2023 after years of losses and two years ahead of target.

But longer-term, combustibles revenue is expected to continue to fall, while some investors think replacing this revenue with vaping may be harder than the company expects. CEO Tadeu Marocco contends that the "refined strategy commits us to 'Building a Smokeless World', a predominantly smokeless business, with 50% of our revenue from Non-Combustibles by 2035."

Reckitt Benckiser

Like Unilever, Reckitt Benckiser has been effectively flat over the past five years. The company owns many famous brand names, including Dettol, Strepsils, Veet, Gaviscon, Calgon and Air Wick. It’s widely assumed that consumers are prepared to pay a price premium for cleaning products and medications compared to other categories.

In its full year results for 2023, Reckitt delivered like-for-like sales growth of 1.5%. On an IFRS accounting basis, however, revenues fell by 4.6% to £3.7 billion. On a like-for-like basis, hygiene sales rose 7.7%, while nutrition sales fell by 9.9%.

One major concern, however, is the ongoing legal battle over Reckitt's Mead Johnson baby formula product Enfamil. A family in Illinois, whose premature baby died in intensive care, was recently awarded $60 million in damages after a court found the product should carried a warning that it increased the likelihood of babies developing necrotising enterocolitis. Chief executive Kris Licht is appealing, so any lengthy legal headache is likely to weigh on the shares and broker Jefferies estimates that damages from any class action suits could be as much as $8 billion.

Haleon

Like Reckitt Benckiser, Haleon is a consumer healthcare multinational which controls its own famous brand portfolio — including Sensodyne, Panadol and Centrum vitamins. And it’s widely regarded as one of the largest over-the-counter medicines operators in the world.

Spun off from GSK, the company could remain a stalwart of the FTSE 100 for decades to come. In its first quarter trading statement, Haleon delivered organic revenue growth of 3%, with prices up 5% although volumes fell by 2%. Revenues fell by 2.2% to £2.9 billion due to currency fluctuations, however its so-called power brands, including Sensodyne, Centrum and Polident, grew organic revenue by 5.2%. Operating profits grew 4.5% to £655 million, while organic growth growth rose 12.8%, boosted by gross margin improvements and cost cuts.

CEO Brian McNamara said: “First quarter trading was solid and in line with guidance shared when we reported FY 2023 results. Organic revenue growth of 3.0% was impacted by lapping tough comparatives in the prior year particularly in Respiratory Health and Pain Relief. Despite this, strong innovation combined with successful execution of our go-to-market strategy underpinned performance in our Power Brands which grew 5.2% with particularly strong performance in our Oral Health and VMS portfolio."

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Best consumer staples stocks to watch summed up

These are just a selection of some of the top consumer staples stocks. Always do your own research. Past performance is not a guide to future returns.

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