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By Josh Peters, CFA | 02-20-2014 10:30 AM

These Discounted Dividend Payers Can Be Portfolio Staples

Emerging-markets concerns are pressuring consumer defensive stocks and therefore creating buying opportunities for investors, says DividendInvestor editor Josh Peters.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Consumer staples stocks have been under pressure throughout 2014. I'm here with Josh Peters--editor of Morningstar DividendInvestor and also Morningstar's director of equity income strategy--to see if any opportunities have opened up.

Josh, thanks for joining me today.

Josh Peters: Good to be here, Jeremy.

Glaser: What's happening in the staples sector? Why has it been under pressure so far this year?

Peters: I think a lot of it has to do with what's going on in emerging markets. What we've seen here in the last couple of months is some turmoil in countries like, say Turkey, and now more recently Ukraine. We've seen currency issues, falling emerging-markets currencies. Venezuela could devalue its currency; it's already practically a black market situation there. Argentina has been a problem. You can say any one of these countries shouldn't have a big impact on a giant company like a Unilever or a Philip Morris International, but when a lot of them are going south at the same time, you're getting some pretty stiff headwinds here for near-term revenue and earnings-per-share growth.

Glaser: Are these just temporary factors that you think over the long run will even out, or are these really serious potential long-term concerns about the health of emerging markets?

Peters: I'm inclined to think that this is more of a buying opportunity that, these issues are going to be temporary. Over time you expect that some of these emerging economies are going to have political problems, economic problems, if their currencies are going to depreciate relative to the dollar.

That said, the bigger companies whether it's a Philip Morris or a Coca-Cola, a Unilever that are selling into these markets, these are still defensive consumer goods. They are not so much discretionary purchases that are very easy to simply not make as opposed to buying new cars or building houses when economies are under stress.

It's really been the currency effect, I think, that has hurt the most, and you're seeing a company like Philip Morris that would ordinarily be looking at 10% to 12% type of earnings per share growth. Currency headwinds are still so stiff for them right now that they're looking at EPS probably declining a bit this year.

But what you're getting is still that underlying stability, currency issues aside as well as a very strong dividend, a very generous dividend yielding mid- to high-4% range lately. In fact, I think almost close to 5% on some days for Philip Morris; that should grow at a good clip over the long run. They're certainly going to benefit like most of these companies will from having exposure of these faster-growing markets. But even though it is a very steady business, they put a pretty conservative payout ratio in place. A 65% payout ratio target for Philip Morris leaves room for currency and other issues to hammer profits in the short term by 35%, and yet they still fund the dividend.

So, they're doing exactly what I would expect them to do. The currency headwinds are not always going to be so fierce. Sometimes they're going to turn into tailwinds, and that's when I think you will see a lot of these stories start to recover.

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