Investors Embrace Consumer Staples ETFs

San Francisco (Reuters) – Investors looking for stability and dividends have been pouring money into consumer staples ETFs of late, ignoring warnings from Wall Street's analysts about pricey valuations for companies like Clorox and Campbell Soup.

Widely viewed as relatively safe bets in a world of macroeconomic worries, shares of companies selling everyday consumer products like processed food and cleaning supplies have outperformed most other sectors in the past year, and fund flow data suggest investors expect more of the same.

The number of new institutional owners—like hedge funds, pension funds and mutual funds—of Campbell Soup in the last quarter has jumped 92%, according to research firm Morningstar. New institutional owners of Coca Cola Co. rose 81%.

In the past two weeks, the Consumer Staples Select Sector SPDR ETF (XLP | A-92) attracted $333 million in net flows, while just $105 million went into the Consumer Discretionary Select Sector SPDR fund (XLY | A-90), according to ETF.com. However, only XLP is outperforming the broad market.

Chart courtesy of StockCharts.com

High-Dividend Yields

With relatively high dividend yields, including a 4% annual payout to shareholders from Philip Morris International, consumer staples companies remain a key holding for investors worried about a shaky global economy, even as the United States shows signs of slow improvement.

Consumer staples companies in the S&P 500 are expected on average to post 3.7% higher earnings in 2016, according to Thomson Reuters I/B/E/S. That is better than an expected 0.8% increase across the S&P 500, but not as good as the 12.4% earnings jump predicted for the consumer discretionary sector.

"We still want a fair amount of exposure to staples," said Thomas Martin, a portfolio manager at Globalt Investments, which owns shares in Campbell, Kraft Heinz, Estee Lauder, Walmart Stores and tobacco companies. "The economy is still bumping along on a slow-growth trajectory."

The S&P consumer staples index .SPLRCS now trades at about 20 times expected earnings, compared with 17 for the consumer discretionary index .SPLRCD, according to Thomson Reuters data.

High Valuation Warnings

Following the consumer staples index's 12% rise in the past year, some analysts warn of high valuations, with General Mills, Procter & Gamble and most other companies in the sector trading above 20 times expected earnings, compared with an average of 17 across the S&P 500.

"On the consumer defensive side, we view in general the industry as a bit inflated," said Morningstar analyst Erin Lash.

A year ago, Campbell Soup, Kellogg, McCormick & Co. and Clorox were among the 10 S&P 500 stocks with the worst average recommendations by sell-side analysts. Many of them warned about a strong dollar's impact on demand overseas, and stagnant sales as consumer tastes shifted toward fresher foods.

But since then, those stocks have each gained between 21% and 31%, lifted by cost-cutting initiatives that have improved margins and progress updating their product lineups to appeal to new consumer tastes for "natural" and organic food. The S&P 500 is up 1% from a year ago.