Investors get teeth into food groups It clearly takes a lot to spoil investors" appetite for food and drink stocks. On Thursday Nestlé and Diageo, two of the biggest and brightest stars in the consumer staples firmament, missed consensus expectations and flagged up concerns in the emerging markets whose heady growth has driven their performance - and valuations - over recent years. No matter. The duo, with market capitalisations of $225bn and $76bn respectively, saw their shares end the day higher. "People just don't want to sell," says Charlie Mills, an analyst at Credit Suisse. Because what else do you buy? It is a question that is being asked increasingly as sector valuations pirouette further away from the broader market - on around 17-18 times next year's earnings, the current premium is about 50 per cent. But other equities are not the only comparison investors have in mind. Consumer staples" defensive qualities, consistent earnings growth and dividend yield of 3-4 per cent confer quasi government bond status on their shares. That means, at a time when $20tn of government bonds are yielding less than one per cent according to Bank of America Merrill Lynch, the sector is shaping up as a key beneficiary of the great rotation from bonds to equities. "The only thing Nestlé doesn't have compared to the Swiss government is a printing press, so if you can swap [Swiss government bonds"] 62 basis points for the 500 basis point free cash flow yield at Nestlé, it's pretty compelling," says Jamie Isenwater, an analyst at Deutsche Bank. Other traditionally defensive categories, meanwhile, are looking a little less compelling, he adds. Pharmaceutical companies face a patent cliff and thus more competition from cheaper generics. Telecom companies are cutting back on once chunky dividends due to long-term declines in profits and revenues. Food retailers, meanwhile, are struggling with weak European consumers. Any claim to consistency in the sector has been undermined by profit warnings. But manufacturers of food, such as Nestlé, Danone of France and Anglo-Dutch Unilever, have "a lot of bond-like qualities," says James Edwardes-Jones, an analyst at RBC Capital Markets. Earnings, he says, "don't move around a lot," and revenue growth typically comes in at 5-7 per cent a year. And unlike some sovereigns they are not highly geared, with an average European net debt/earnings multiple of 1.5 times, before interest, tax, depreciation and amortisation. Even while missing expectations with its first quarter numbers - the third quarterly disappointment in a row - Nestlé still delivered organic growth of 4.3 per cent. This was the first time it had missed expectations three times in a row for over 11 years, according to Bernstein Research Fans of the sector also argue that, again unlike a number of sovereigns, food and drinks manufacturers have largely got their act together in recent years. The 1980s and 1990s were scarred with management misjudgments that led to ill-conceived and pricey takeovers. This was an era when Unilever paid an enterprise value of 2.7 times for Bestfoods of the US (in 2000) and when portfolios were sprawling. Diageo, now wholly focused on alcoholic drinks, once owned fast-food joint Burger King and Pillsbury Foods" cookie dough. BAT supplemented cigarettes with high fashion courtesy of Saks Fifth Avenue and in 1989 was the largest UK-based insurance group. Danone had beer and biscuits alongside its yoghurts. Today the only real diversification is geographic, with increasing income coming from emerging markets, which now account for 30-60 per cent of the European sector's sales. Top executives have also overcome some tough headwinds, including inflation of input prices and economic crises across swathes of the developed world. Results of this turnround are graphic. Since the turn of the millennium, the big six UK consumer staples have, in aggregate, outperformed the FTSE 100 every year apart from 2003, when they underperformed by a whisker, according to Oriel Securities. "Companies have done what investors want them to," says Chris Wickham, an analyst at Oriel Securities. And all the benefits of focus have delivered this period of more than a decade of out performance. He adds that this turnaround underpins the change in investor sentiment too. They were dismissed as boring in the 19890s and 1990s. But I have not met anyone since 2008 who has not had a passion for these companies. The only cynicism is ... if market conditions improve do they all get left behind? Potentially bigger risks exist. China, galled by its citizens" frenzy for foreign baby milk, could slap on a ban. Governments in the west, tiring of spiralling health budgets and the growing costs of obesity, might decide to do likewise with fizzy drinks. Others may look to a return of prohibition, banning all spirits and other alcohol. But the possibility of these happening is seen as near to zero. At the end of the day, says Mr Isenwater, "as long as people need to eat, you should be alright."