Sector Analysis: CPG Stocks

In a world where the NASDAQ, S&P 500, and even the TSX Composite are all within a hairsbreadth of all-time highs, it’s easy to throw up your hands and sit on cash. There’s no value out there, you exclaim, so I’m going to take my money and go home.

I embrace a more optimistic approach. My view is there are always buying opportunities. Value is out there. It’s up to us as analysts to find it.

I’m looking to buy excellent companies at a discount to their intrinsic value. My view is this exercise will maximize my dividend income, deliver capital gains, and combine to offer total returns in the 9-12% range annually. My hurdle rate is 10%, so I’m happy with that.

It’s the perfect solution for those of us who only want to spend the dividends in retirement. We can withdraw the dividends while the underlying investments grow. We can then periodically cycle out of something that’s overvalued and put the capital back to work in something that offers a higher yield. That further bulletproofs what is already a conservative retirement plan.

I think this cycle strategy has some legs, and so I’ll cover it further in a future newsletter.

In the meantime, let’s take a closer look at a sector that has delivered so many dividend champions, the consumer packaged goods (CPG) sector. Virtually the entire sector is beaten up today, and I believe there are opportunities there.

Let’s dive in.

We’ll first take a closer look at the sector in general, and then pivot to individual names.

There are a few issues that are impacting the sector today, including:

Let’s start with the big elephant in the room, GLP-1s. They not only help a lot of people lose weight, but they also have proven to be successful in helping to reduce cravings.

We tend to think of food as something that’s evenly distributed. We all have to eat, and we need a certain amount of calories to keep warm and keep our brains working. Overweight folks eat more calories, but not excessively so.

CPG bears argue reality is much different. They say that junk food is largely consumed by a small portion of the population in a Pareto Principle-esque fashion. If just a small portion of the 20% of folks who eat 80% of the junk food end up ditching the Doritos for Ozempic, it creates a big problem for the industry.

If GLP-1s were the only thing impacting BIG FOOD, then investors could isolate the impact and see exactly how it’s affecting the names in the industry. But there are other things happening here, including a weak consumer, which has also impacted growth.

In a world where inflationary pressures just don’t seem to end, consumers are being forced to make tough decisions. Most folks aren’t too interested in cutting things out completely, but they’re happy to make changes. That might include less protein (which is crazy expensive these days), more boring staples like rice, potatoes, or pasta, and switching to cheaper treats.

It can be as simple as switching from a regular bag of chips to a Dollarama sized bag of chips. That doesn’t seem like much, but every time you do that Pepsico loses out on a buck or two. Multiply that by millions of consumers and it adds up.

Consumers are increasingly likely to get upset about their grocery bills, too. If you want a guaranteed way to go viral on the ol’ Tweeter app, load up your cart with basics that aren’t on sale, snap a picture of the receipt, and say something about how Galen Weston is personally ripping you off. Thousands of people will join in.

It’s a little bit ridiculous, but I get it. Inflation sucks.

Another thing that has impacted growth is a lack of immigration. In both Canada and the U.S., immigration has taken a big hit. Both nations experienced huge growth in immigration between 2021 and 2024. New leaders in both nations took over in 2025, and both have done what they can to discourage new folks from coming. Trump has done it in a very visible way, while Canada’s new Prime Minister worked behind the scenes, doing things like reducing the number of foreign students. The result has largely been the same; a bunch of potential new CPG customers haven’t arrived. That’s bad news for growth.

And finally, let’s talk private label. In a world where so many customers are feeling the pinch, it’s only natural they start looking for cheaper alternatives. Stores love it too; when executed properly, private label can strengthen a grocer’s competitive advantage, provide happiness for customers, and help with price perception. Margins are comparative, too.

But before we get too excited about private label, I’d like to remind y’all that it has been a thing for about 50 years now. Quality has come a long way in that time, but many brands are still better. And when you look around a supermarket, you see areas where private label has done quite well, and areas where nobody’s buying the store brand counterpart. Certain CPG companies are also happy to do private label, so they get a piece of that pie as well.

In addition, we saw in 2018 private label posted terrific growth numbers. In hindsight we know that was a terrific time to buy the leading CPG stocks.

And finally, we have investors who were in these names during COVID deciding it’s time to go. They’re rotating to sexier names, which is also causing price weakness. They’re comparing today’s results to results in 2021-22 (when CPG stocks were overearning), and declaring the entire sector a wasteland.

Anyway, put it all together, and the entire sector is weak. Most large consumer staple stocks are down over the past 3-5 years, with some disastrously so. Here’s how some of the biggest names have fared over the last three years, excluding any dividends:

There’s more, too. But you get the picture.

Meanwhile, the S&P 500 is up 70.7% over that time. That’s so ugli it’s spelled with an I.

I’m a whore for value, so I’m interested in the sector. I’ve taken the last few weeks and analyzed most of the names, and I’ve narrowed it down to a few that I’m interested in. I’ll cover each in a minute, but first I want to tell y’all what exactly I’ve looking for with CPG stocks.

I know y’all want to get to the actual stock analysis, so I’ll make this brief.

One of the nice things about seemingly an entire sector blowing up is you can pick and choose which names you like. There’s a variety of choices; it’s almost like a buffet.

And like a buffet, you want to be strategic. Don’t just load your plate up with potatoes and salad they put at the beginning. That’s how they get you.

You want to take a walk first, see what the place has to offer. Then you’re going in.

In simple terms, I’m looking for:

What I’m not necessarily looking for:

For example, there is one person on the Tweeter app who is big into Campbell’s. He’s enticed by the low valuation (around 11x earnings) and the eye-popping 7.2% dividend yield. My view is he’s missing the very real chance of a dividend cut, the meh at best balance sheet, and the fact Campbell’s hasn’t actually grown earnings in a decade.

Kraft Heinz hasn’t either; in 2016, the company earned $3.33 per share in normalized earnings. It got close to that number in 2024, when it posted $3.06 per share in EPS. That number fell to $2.60 in 2025, and is expected to fall even further in 2026. So it has been eliminated from consideration.

I’m also going to tap into my grocery experience (I was in the business for ~15 years before I retired) and use that to factor into my decisions.

Without further adieu, the list.

Coca-Cola FEMSA (NYSE:KOF) is Latin America’s largest Coca-Coca bottler and in terms of total customers served is the largest on the planet. 268M consumers in Mexico, Colombia, Brazil, Argentina, and various other countries get their Coke Zero and Monster Energy drinks from KOF.

The majority owner of this one is FEMSA, along with the Coca-Cola company. Bill Gates’s foundation is also a large shareholder. I really like the FEMSA ownership because it is the owner of the Oxxo chain of convenience stores in Mexico. What a great partnership.

I like this one over the other Coca-Cola bottlers for a few different reasons. Firstly, I see a long-term growth opportunity tied to per capita income growth. As folks in Latin America get richer, they should be able to afford more Coca-Cola products. Coca-Cola’s market share in Latin America is dominant, too. Pepsi is barely a thing there. The company is also investing fairly aggressively in new bottling plants and warehouse space, which will allow it to better reach some of its customers.

KOF also has all the things we’re looking for. The balance sheet is pristine; its debt-to-EBITDA ratio is under 1x. And that’s after those capex investments. I suspect we’ll see a big share buyback or special dividends happen soon. The valuation is also quite reasonable. I liked this one more at $85 versus $110, but even at today’s somewhat elevated price you’re still buying shares for under 15x earnings. The dividend yield is still above 4%, and dividend growth has been solid — averaging about 7% per year over the last decade. The payout ratio is also quite reasonable.

It checks off all the boxes, and I envision owning it for a long time.

Hershey is a household name in both Canada and the United States, and it is the continent’s leader in confectionary. But it also has been making acquisitions in the salty snacks space, picking up brands such as Dot’s Homestyle Pretzels (the best pretzels on the planet, and yes I will fight you on that), and Skinny Pop. Put it all together, and the company is number two in snacks in North America, trailing only Pepsi’s Frito Lay.

I like snacks for one main reason — they’re good for both the store and the company. A grocery manager is inundated with a thousand different ideas of what to display. Snacks are the perfect solution. They offer the ability to expand margin, they sell quickly (so you’re not worrying about outdated product), and you can easily expand sales by offering a deal if you buy two or three at once.

Hershey shares struggled throughout 2024 and into 2025 as the rest of the sector suffered. But Hershey had one other problem to deal with. The price of cocoa soared, and the company was forced to buy some supply at not-so-ideal prices. Cocoa futures peaked at more than US$12,000 per tonne in 2024 as poor weather in Africa was expected to do major damage to that year’s crop.

That storm has passed, and cocoa prices are down to a much more manageable US$4,200 per tonne. That’s much closer to the 10-year average.

Hershey is a quality company that hardly ever goes for a cheap valuation. Shares currently trade hands for about 20x forward earnings and about 17× 2027’s projected earnings. That might not seem cheap, but it’s about as inexpensive as Hershey shares get.

We’re also looking at a 3%+ yield on a going forward basis. Combine that with Hershey’s demonstrated excellence on the dividend growth side — it has grown dividends for 48 out of the last 50 years — and projected dividend growth in the 7% range. That should about match earnings growth going forward as the company makes acquisitions, gets cocoa costs under control, and starts buying back shares again.

This is another one I own and plan on holding for a very long time.

Quick notes about a few other big CPG stocks that I think are interesting, but have a few more warts than the few above.

Ambev (NYSE:ABEV): The bottler and distributor for Anheuser-Busch InBEV in Brazil, other parts of Latin America, and Canada. It has a debt-free balance sheet, beer consumption is holding up fairly well in Latin America, it trades for a reasonable valuation (about 15x earnings), and has excellent returns on equity and invested capital.

On the negative side it is trading for close to a 52-week high, and earnings growth has struggled. Especially when converted to USD.

Hormel (NYSE:HRL): Hormel is a dividend growth darling, increasing its payout for 57 consecutive years. It also is big into protein, which I think is a growth play over the next couple of decades. Shares trade hands for about 17x earnings, which is the cheapest valuation in the last decade. Earnings have also been hit by protein inflation, which should subside at some point. Finally, the balance sheet is terrific. Among the best in the sector.

On the negative side, Hormel has dealt with protein inflation for years now, and it keeps getting worse. Not better. This has impacted earnings growth, which has been pretty much nonexistent for a few years now. I own Hormel.

Embotelladora Andina (NYSE:AKO.B) is the other Coca-Cola bottler in South America. Its territory includes Chile, Brazil, Argentina, and Paraguay. It trades for about 12x earnings and pays a dividend that approaches a 5% yield. It also has a nice balance sheet, although not quite as good as Coca-Cola FEMSA’s. It should grow nicely for the same reasons as KOF.

I’ll point out that earnings have increased from 574 Chilean Pesos to 1,703 Chilean Pesos from 2016 to 2025. Not bad for a mature player. Oh, and Coca-Cola is a major shareholder here, too.

Pepsico (NASDAQ:PEP) owns a meh soda company, a pretty good packaged food business (Quaker Foods, mostly), and Frito Lay, which I think is the best food company on the planet. If Pepsi ever spun out Frito into its own entity I would own a lot more of it in my portfolio.

Anyway, Pepsi is back to being cheap again. The dividend yield isn’t quite at a 10-year high, but it’s close at the current level of 4.2%. I just don’t like the company’s balance sheet enough to really get excited about it today.

I think the CPG sector is attractive today, but mostly in the United States. Canada doesn’t have much of a CPG sector, and even then most of our top names are doing pretty well.

I realize this may not be a popular post in today’s world of GLP-1s, growth in private label, and the general disinterest surrounding the sector today. It feels wrong to be interested, but I think it’s the right time to start looking.

Pretty much the whole sector has been destroyed, so we can really be selective here and go for the best. My best include Coca-Cola FEMSA and Hershey, with a little Hormel thrown in there. I own all three. Yours may differ.

Let me know what you’re looking at in the sector. Either reply to this email or use our comment section.