Strong consumer product companies share a number of characteristics. These include geographic diversity, a record of rising cash flow and strong balance sheets

At TSI Network, we like high-quality blue chip consumer product companies because they can provide stability during a recession or economic slowdown. Typically, consumer products companies sell staples, like soap, soup and beverages that consumers must buy no matter what the economy is doing.

Strong consumer product companies share a number of characteristics. These include geographic diversity to protect them from regional economic difficulties, a record of rising cash flow and strong balance sheets. All these are characteristics of blue chip stocks.

The spike in commodity prices in the early part of this decade pushed many consumer product companies to deeply cut their costs. Now that commodity prices have moved down, it has ended up letting them boost their profits as well as free up cash for expanding and upgrading their operations, or for increasing their dividends.

We believe that a record of increasing dividend payments is a good indication of a strong company, especially in a slow economy. High-quality blue chip stocks will usually be in a position to remain profitable during almost any type of economic hardship or recession. Plus, you get paid dividends and earn income while you hold these stocks even if share prices are falling.

Beverage makers know how to weather economic storms

Beer stocks, in particular, have potential for both rising dividend income and capital gains. To show you how this works, here’s a sample:

Molson Coors Canada Inc. (Toronto symbols TPX.A and TPX.B) is our favourite pick in the brewing industry.

Since 2005, this company has been paying down debt and raising its dividend. Molson Coors has been paying a dividend since 1988. During tough economic times, it cut costs and increased sales. That has pushed up earnings. Molson Coors is well-diversified, with a number of lower-cost brands that especially benefit from recessionary shopping trends, and premium brands that continue to generate high profit margins.

Canada and the U.S. are Molson Coors’ main markets, but it also sells its beer in the U.K., Asia and Latin America. It reaches these markets through licensing agreements with local breweries or direct exports. The company should benefit from this broad global exposure, as some countries may well see a faster economic recovery (and corresponding rise in consumer spending) than others.

Brewers face rising competition from makers of wine and liquor and small craft beer makers. Consumers are now more health-conscious than ever before, and are drinking less beer as a result. However, like all good defensive stocks, top beer companies such as Molson Coors will continue to benefit from strong brand loyalty and habitual use.

Finding blue chips in all five sectors—including consumer products

Besides the consumer product company sector, there are four other major economic sectors Manufacturing & Industry; Resources; Finance; and Utilities. All of these sectors have blue chip companies in them that we recommend. Below is a list of factors we like to see in companies when we look for overall investment quality.

Financial factors:

• 5 to 10 year history of profit. Companies that make money regularly are safer than chronic or even occasional money losers.
• 5 to 10 years of dividends. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stock picks, you’ll avoid most frauds.
• Manageable debt. When bad times hit, debt-heavy companies often go broke first.

Safety factors:

• Industry prominence if not dominance. Major companies can influence legislation, industry trends and other business factors to suit themselves.
• Geographical diversification. Canada-wide is good, multinational better. There’s extra risk in firms confined to one geographical area.
• Freedom to serve (all) shareholders. High-quality stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies.

Survival/growth factors:

• Freedom from business cycles. Demand periodically dries up in “cyclical” businesses, such as resources and manufacturing. That’s why you need to diversify. Invest in utility, finance and consumer stocks, along with cyclical resource firms and manufacturers.
• Ability to profit from secular trends: These trends outlast ordinary business booms and busts, because they reflect ongoing social change. Free trade and rising environmentalism are just two examples of secular trends.
• Ownership of strong brand names and an impeccable reputation. Customers keep coming back to these businesses, and will try their new products.

How much of your portfolio is invested in consumer product companies? Do you own any other blue chip consumer product companies? Share your experience with us in the comments below.

Note: This article was originally published in June 2009 and has been updated.