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Grocery Store Surge for Income

April 23, 2020

The economic lockdowns along with the work at home and stay at home practices around the US have sent every household to load up their grocery carts.

Entire aisles of shelves are being emptied again and again. As a result, grocery stores have been seeing a surge in shoppers and sales.

And even if you aren’t the one doing the shopping—I discussed delivery services like Shipt.com and Instacart a few weeks ago—orders are flooding in that deploy more and more folks to grab items from shelves. This only brings more competition for consumers.

US Grocery Store Retail Sales—Source: US Census Bureau & Bloomberg Finance, L.P.

Sales have been on the general upswing as tracked by the US Census Bureau over the past five years. But March saw an unprecedented surge in demand and sales soaring by 30.8%.

Of course, food is a big driver. And with restaurants off-limits for now and for some time to follow, prepared food, packaged food as well as fresh food have taken over, with companies making and selling the food products all the more profitable.

I recently read an interview with John Catsimatidis of Gristedes Foods, which is one of the largest grocery store chains in the metropolitan New York City market. He stated that pre-lockdowns, New Yorkers spent 60% of food purchases in restaurants.

That has nearly completely been shut down, with the grocery stores picking up the food business left in a vacuum. And I would imagine that this has increasingly been the case nationwide.

Then, add in household products from soap, cleaners, disinfectants and, of course, toilet paper, and the companies that make and sell these necessities are firmly in the driver’s seat now and for some time to follow.

Now, this is not without challenges. Factories and food plants around the US are being challenged by the virus as well.

Smithfield Foods (WH Group, WHGLY) closed its major plant in South Dakota, followed by JBS Foods (private) shutting its Minnesota plant. And yesterday, Tyson Foods (TSN) announced the closure of its plant in Iowa.

This is bringing additional costs to clean facilities and to provide more space and protections for workers. And transportation and supplier costs are also up, placing some additional challenges. But pricing power is back for many goods and thus margins should be supported.

Many of the leading food and household products already went through transformations in their products and brand management along with cost controls, so they are in a much better position to profit now and going forward.

Food, Glorious Food

Food sales are screaming at grocery stores. For March alone, retail food and beverage sales were up by 29.6%.

US Retail Food & Beverage Sales—Source: US Census Bureau & Bloomberg Finance, L.P.

On the food front, I’ll start with Hormel Foods (HRL), which is a leading meat and packaged foods company.

Before the virus mess in the US, it was benefitting from another virus problem in the African Swine Fever (ASF), which culled millions of pigs around the globe and made Hormel a safe, quality, go-to company. But now, its packaged products are firmly in demand. Yielding 1.9%, it is a buy in a tax-free account.

Next is Nestle (NSRGY). Nestle offers products that carry consumers from daybreak to evening, from coffee to seasonings and sweets.

And while we are all at home, nothing has changed for our pets, as they’ve always been at home and in need of food and care, which Nestle continues to offer. It has a distribution of $1.56 per share for a yield that is defended at 2.5%. NSRGY is a buy in a taxable account.

Joining Nestle in packaged foods and snacks is Mondelez (MDLZ). Open nearly any pantry, particularly in homes with children, and you’ll find plenty of products from Mondelez—cookies, crackers, salty-snacks, chocolates as well as processed cheese and plenty of beverages on the shelves that came from the local grocer.

The company was one of the first in the Profitable Investing model portfolios to provide proven reforms of its brands and products while also controlling costs. It has a defended dividend distribution running at 28.5 cents for a yield of 2.1%. It should be bought in a tax-free account.

Toilet Paper, Soap & Beyond

On the household products front, Procter & Gamble (PG) and Colgate-Palmolive (CL) are leaders.

P&G has a laundry list of soaps and personal care brands that are ubiquitous, including the Charmin Bears and their toilet paper.

The company was long a laggard in reforming its products and costs but began to prove that it could fix itself starting in 2018. It has a distribution of 79.07 cents for a yield of 2.5%. PG should be bought in a tax-free account.

Colgate helps all of us be cleaner with shinier teeth as well as helping with cleaner dishes and homes. And we all smell better with its deodorant products both during the lockdowns and going forward.

And like for Nestle, Colgate also keeps our dogs and cats well-fed and looked after. CL has a defended distribution of 44 cents for a yield of 2.4% and is a buy in a tax-free account.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life

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