US food and drink companies are well-positioned for fixed income investors as the sector looks to cost-cutting and M&A activity, according to Janus Henderson co-head of credit research, John Lloyd, and credit analyst, Brad Smith.
The defensive sector offered stable cashflows which were enticing for fixed income investors in an extended credit cycle.
They said, while the sector was less attractive for equity investors, it was more enticing for those investing in bonds. This was due to the fact the industry was taking the ‘rare’ step in planning to pay down debt and was willing to hold or cut dividends, demonstrating its commitment to maintaining an investment grade rating.
“Since coming out of the global financial crisis, the sector has traded down from AA-like valuations to be more in line with BBB’s and has consistently underperformed its peers in the investment grade index,” the pair said.
“This extensive revaluation suggests the industry headwinds are well acknowledged and appropriately reflected in valuations.”
Industry headwinds included the growth of private labels taking market share from popular brands, retail pressure, loss of brand loyalty among younger consumers and newer online distribution channels.
Lloyd and Smith highlighted positive moves by Kellogg, which was investing in its supply chain, Campbell Soup, which was seeking to unload assets outside of the US, and General Mills which was looking to divest five per cent of its portfolio.
“As these companies look to delever, active managers can benefit from analysing the capital structure to determine which bonds are ripe for pay down.”
The S&P ASX 200 Food Beverage and Tobacco sector has returned 19.7 per cent since the start of 2019 and 4.3 per cent over the past 12 months, according to FE Analytics.
