3 Safe Dividend Kings to Recession-Proof Your Portfolio
Income investors should focus on stocks that pay solid yields, but also those that have sustainable payouts and strong business models.
Dividend kings are an excellent place to look for stocks with sustainable dividends. These are companies that have raised their dividends each year for more than 50 consecutive years.
The following three dividend kings have low dividend payout ratios and recession-proof business models, meaning their dividends are well-covered even when the economy is suffering.
Walmart (WMT)
Source: Alexanderstock23 / ShutterstockWalmart (NYSE:WMT) traces its roots back to 1945 when Sam Walton opened his first discount store. The company has since grown into the largest retailer in the world, serving more than 230 million customers each week. Revenue should be around $668 billion this year.
This dividend king posted first quarter earnings in May, and results were better than expected on both the top and bottom lines — and by wide margins in both cases. Adjusted earnings-per-share came to 60 cents, which was eight cents ahead of expectations. Revenue was up 6% year-over-year to $161.5 billion. This was a staggering $3.36 billion better than estimates.
Global ecommerce sales soared 21% higher year-on-year, which was led by store-fulfilled pickup and delivery, as well as good performances from the company’s marketplace. Global advertising revenue also rose 24%, including Walmart Connect in the US. Comparable sales in the US rose 3.8%, which was 40 basis points ahead of estimates. Transactions were up 3.8%, while the average ticket size was flat to a year ago. For Sam’s Club, ecommerce sales rose 21% and contributed 280 basis points to comparable sales.
Walmart’s competitive advantage is in its enormous size, as it can buy and ship product at scale, which few retailers can compete with. This allows it to operate with low prices to consumers and — as more than half of its revenue comes from groceries — its recession performance is excellent.
The company’s payout ratio is quite low at 34% expected for the full fiscal year, making for a conservative dividend policy. The dividend should be very safe, even in a recession. Walmart has increased its dividend for 51 years.
Hormel Foods (HRL)
Source: monticello / ShutterstockHormel Foods (NYSE:HRL) was founded in 1891 in Minnesota. Since that time, the company has grown into a $17 billion market capitalization juggernaut in the food products industry with over $12 billion in annual revenue. This dividend king has kept its core competency as a processor of meat products for well over a hundred years. But it’s also grown into other business lines through acquisitions. With products in 80 countries worldwide, Hormel’s portfolio of brands includes Skippy, SPAM, Justin’s and more than 30 others.
Admittedly, the results of Hormel’s second quarter earnings were somewhat weak. Revenue was off 3% year-over-year to $2.89 billion and missed estimates by $80 million. Sales also fell in the retail and international segments.
However, earnings-per-share were two cents ahead of estimates and gross margin was 17.5% of revenue — 100 basis points better than expected. Guidance for this year is for sales growth of 1% to 3%, with a slightly raised earnings estimate.
Irrespective of those results, the company has a track record of consistent results from a steady stream of acquisitions and some organic growth. This has afforded Hormel the ability to consistently raise its dividend, securing its status as a safe dividend king. I’m forecasting forward earnings growth of 5% annually as Hormel could grow more slowly than it has in the past. (Sales growth is the primary driver of earnings-per-share expansion moving forward.)
Hormel’s main competitive advantage is its ~40 products that are either #1 or #2 in their category. Hormel has brands that are proven, and that leadership position is difficult for competitors to supplant. In addition, the company has a global network of distributors that few food companies can rival. It’s also worth mentioning that Hormel’s earnings-per-share actually grew during the Great Recession while most of the world was in rather dire straits. That’s a testament to the company’s defensive nature.
Hormel has increased its dividend for 58 consecutive years.
Johnson & Johnson (JNJ)
Source: Michael Vi / ShutterstockJohnson & Johnson (NYSE:JNJ) is a diversified health care company and a leader in the area of pharmaceuticals and medical devices. The company was founded in 1886 and employs more than 150,000 people around the world.
According to first quarter earnings reports, revenue grew 2.3% to $21.4 billion, which was in-line with estimates. Adjusted earnings-per-share of $2.71 compared to $2.68 in the prior year and was $0.06 better than expected. Excluding Covid-19 vaccine sales, the company’s revenue total grew 7.7% in the first quarter.
Revenue for Innovative Medicines improved 1.1% on a reported basis, but was higher by 8.3% when excluding currency translation. Infectious Disease fell more than 48%, mostly due to reduced Covid-19 vaccine revenue. Oncology continues to act well, with revenue up 17.1% due to continued strength in Darzalex, which treats multiple myeloma.
Johnson & Johnson has grown earnings over the past 10 years at a rate of 6.3%. A diversified business model and stable growth have allowed the company to grow earnings before, during and after the last recession, showing that its products are in demand regardless of market conditions. We expect earnings-per-share to grow at a rate of 6% per year through 2029 due to gains in revenue and share repurchases.
With a dividend that has increased for 62 consecutive years, Johnson & Johnson has a reasonably low payout ratio of approximately 46% for 2024. This gives the company ample room to raise its dividend, even in a prolonged recession.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.
https://investorplace.com/2024/07/3-safe-dividend-kings-to-recession-proof-your-portfolio/
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