Investors tend to flock to areas of safety leading up to, and during periods of recession. This is because when a recession strikes, more cyclical and companies with riskier earnings streams offer poorer prospects for one’s capital than companies that are unaffected by economic downturns.
In practice, this means sectors such as technology and consumer discretionary tend to perform very poorly, while sectors such as utilities and consumer staples outperform due to their reliable earnings streams.
For dividend investors, this is especially important because reliable earnings streams generally equal reliable dividend payments.
With this in mind, let’s take a look at three consumer staples stocks — food stocks, specifically — that we believe have the ability to continue paying their dividends even in a severe recession.
Comfort Food for Income Investors
Our first stock is Campbell Soup (CPB) , a company that makes and distributes a huge variety of food and beverage products in the U.S. Campbell operates two primary segments: Meals & Beverages, and Snacks. Through these segments the company offers its namesake soup brand, broths, pastas, gravies, beans, sauces, tomato juice, and other non-dairy products. It addition, it has a large snack business with popular brands such as Pepperidge Farm, Milano, Goldfish, Late July, Emerald, and more. Campbell has thousands of distribution points in the U.S., as well as thousands more internationally.
The company was founded in 1869, produces about $9 billion in annual revenue, and trades with a market cap of just under $16 billion.
Campbell has been an income stock for some time, continuously paying dividends to shareholders for more than a decade. However, its dividend increase streak ended in fiscal 2022 as the company chose not to raise the payout. Today, it remains at $1.48 per share annually.
That puts the payout ratio at a highly sustainable 51% of earnings, particularly sustainable because the company’s earnings stream is unfazed by recessions. Campbell sells mostly consumer staples — core food items that are considered basics, and not luxuries — so demand is steady throughout differing economic conditions.
Further, we see 3% growth annually on the horizon for Campbell, meaning it should be able to maintain and raise its dividend as it sees fit in the coming years. We note the combination of the low payout ratio and decent earnings growth means there is virtually no risk of a dividend cut, regardless of whether a harsh recession strikes or not.
Finally, despite some rallying in the share price of late, the stock yields a very respectable 2.8%, nearly double that of the S&P 500, making it a strong income stock.
A Dividend General
Our second stock is General Mills (GIS) , a company that manufactures and distributes branded packaged foods globally. The company sells a diverse slate of goods, including cereals, yogurt, soup, meal kits, snack bars, ice cream, nutrition bars, frozen pizzas, pet food, and more. General Mills tends to be towards the premium end of the markets it serves, which it can do given its reputation and long operating history. This affords stable demand and strong pricing power, in general.
General Mills was founded in 1866, generates about $19.5 billion in annual revenue, and trades with a market cap of $49 billion.
Similarly to Campbell, General Mills hasn’t been reliable in terms of dividend raises. The company is currently on a streak of three years of raises, but it rather frequently chooses not to raise the dividend. Still, General Mills has paid dividends consecutively to shareholders for decades, so while raises aren’t necessarily reliable, we believe investors can rely upon the payment itself continuing.
We see the payout ratio at just 53% for this year, and given its strong earnings predictability, that puts the risk of a dividend cut at essentially zero. That’s true even in a recessionary environment, as the demand for the company’s products is steady.
General Mills could produce 4% earnings growth on average as well, and should this come to fruition, that would provide yet more security to the dividend payment.
The stock yields 2.6% today, which is about one full percentage point better than the S&P 500.
A ‘King’ Through Thick and Thin
Our third name is Hormel Foods (HRL) , which develops, processes, and distributes various meat, nut, and other food products globally. Hormel’s business differs from Campbell and General Mills in that Hormel is primarily focused on refrigerated and shelf-stable meat products, so its business is somewhat more concentrated than the wide diversification of the other two. Hormel makes a wide range of meat products, including ham, sausages, poultry, pork, turkey, bacon, nut butter, and much more.
The company traces its roots to 1891, generates about $12.5 billion in annual revenue, and trades with a market cap of $27 billion.
Unlike the other two on our list, Hormel sports a world-class dividend increase streak of 57 years. That not only puts Hormel in very rare company on that metric, but it also makes the stock a member of the ultra-exclusive Dividend Kings. Given this, Hormel is among the best-of-the-best when it comes to dividend longevity, and we see no cause for concern for many more years of dividend increases. The company has raised its dividend through some very harsh recessions in the past 57 years. Further, the company has paid quarterly dividends to shareholders every quarter since it went public back in 1928.
Hormel’s payout ratio is 56% of this year’s earnings, so like the others, we believe it is extremely safe. We see 6% earnings growth on the horizon as well, providing yet more safety for what we believe is already a highly reliable dividend.
Finally, the stock’s yield is currently 2.2%, about 0.6 percentage points better than that of the S&P 500. While not as striking as a pure yield play as the other two, Hormel offers a distinct advantage in terms of dividend raises in the past, as well as the potential for many more raises in the years to come.
Final Thoughts
While food stocks and other consumer staples aren’t necessarily the most exciting ways to invest, they can have an important role to play in an investor’s portfolio. After all, periods of economic weakness put into sharp focus those companies with reliable earnings streams, and in particular, reliable dividend streams.
We like food stocks with these characteristics, and we think Campbell, General Mills, and Hormel offer good combinations of current yield and dividend reliability. While only Hormel has a long history of dividend increases, all offer stable revenue and earnings streams that should see them continue to pay their dividends irrespective of economic conditions ahead.
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