3 food stocks to own in a recession

Investors tend to flock to areas of comfort leading up to and during recessionary periods. This is because when a recession hits, companies that are more cyclical and have riskier earnings streams offer a worse outlook for their capital than companies that are unaffected by economic downturns.

In practice, this means that sectors such as technology and consumer discretionary tend to underperform, 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 equate to reliable dividend payments.

With that in mind, let’s look at three consumer staples stocks — food stocks, in particular — 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 manufactures and distributes a wide variety of food and beverage products in the United States. Campbell operates in two main segments: meals and beverages and snacks. Through these segments, the company offers its namesake brand of soups, broths, pastas, gravies, beans, salsas, tomato juice, and other nondairy products. Additionally, it has a large snack business with popular brands like Pepperidge Farm, Milano, Goldfish, Late July, Emerald, and more. Campbell has thousands of distribution outlets in the United States and thousands more internationally.

The company was founded in 1869, produces approximately $9 billion in annual revenue, and operates with a market capitalization 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 streak of dividend hikes ended in fiscal 2022 as the company chose not to increase its payout. Today it remains at $1.48 per share per year.

That puts the payout ratio at a highly sustainable 51% of earnings, especially sustainable because the company’s earnings stream isn’t disrupted by recessions. Campbell sells primarily staples — staple food items considered staples and not luxuries — so demand is constant under different economic conditions.

Additionally, we see 3% annual growth on the horizon for Campbell, which means he should be able to maintain and grow his dividend as he sees fit over the next few years. We note that the combination of the low payout ratio and decent earnings growth means there is virtually no risk of a dividend cut, whether or not there is a hard recession.

Finally, despite some rallies in the stock price lately, the stock returns a respectable 2.8%, nearly double that of the S&P 500, making it a strong income stock.

A general dividend

Our second stock is General Mills (GIS), a company that manufactures and distributes branded packaged foods globally. The company sells a diverse range of products, including cereals, yogurts, soups, meal kits, snack bars, ice cream, nutrition bars, frozen pizzas, pet foods and more. General Mills tends to be toward the premium end of the markets it serves, which it can do given its reputation and long operating history. This offers stable demand and strong pricing power, in general.

General Mills was founded in 1866, generates approximately $19.5 billion in annual revenue, and operates a market capitalization of $49 billion.

Similarly to Campbell, General Mills has not been reliable in terms of increasing dividends. The company is currently on a three-year series of raises, but rather often chooses not to raise its dividend. However, General Mills has been paying dividends consecutively to shareholders for decades, so while increases aren’t necessarily reliable, we think investors can rely on the payout itself to continue.

We see the payout ratio at just 53% for this year and, given its strong earnings predictability, this poses the risk of a dividend cut to essentially zero. This is true even in a recessionary environment, as demand for the company’s products is constant.

General Mills could also produce 4% earnings growth on average, and if that were to happen, that would provide even more security for dividend payments.

Today, the stock returns 2.6%, or about one percentage point higher than the S&P 500.

A “king” for better or for worse

Our third name is Hormel Foods (HRL), which develops, processes and distributes various kinds of meat, nuts and other food products globally. Hormel’s business differs from Campbell and General Mills in that Hormel focuses primarily on refrigerated, shelf-stable meat products, so its business is slightly more concentrated than the broad diversification of the other two. Hormel produces a wide range of meat products including ham, sausages, poultry, pork, turkey, bacon, nut butters and much more.

The company traces its roots back to 1891, generates approximately $12.5 billion in annual revenue, and trades with a market capitalization of $27 billion.

Unlike the other two on our list, Hormel sports a 57-year streak of world-class dividend hikes. That not only puts Hormel in very rare company on that metric, but also makes the stock a member of the ultra-exclusive Dividend Kings. That said, Hormel is among the best when it comes to dividend longevity, and we see no cause for concern for many more years of dividend hikes. The company has raised its dividend through some very tough recessions over the past 57 years. Additionally, the company has paid quarterly dividends to shareholders every quarter since it went public in 1928.

Hormel’s payout ratio is 56% of this year’s earnings, so like others, we think it’s extremely safe. We also expect earnings growth of 6% on the horizon, providing even more safety for what we believe is already a highly reliable dividend.

Finally, the stock’s yield is currently 2.2%, better than that of the S&P 500 by about 0.6 percentage points. While not surprising as a pure yield game like the other two, Hormel offers a distinct of dividend hikes in the past, as well as the potential for many more hikes in the years to come.

Final thoughts

While food stocks and other staples aren’t necessarily the most exciting ways to invest, they can play an important role in an investor’s portfolio. After all, times of economic weakness bring to the fore those companies with reliable earnings streams and, in particular, reliable dividend streams.

We like food stocks with these characteristics and believe Campbell, General Mills and Hormel offer good combinations of current yield and dividend reliability. While only Hormel has a long history of dividend hikes, all offer stable revenue and earnings streams that should see them continue to pay their dividends regardless of future economic conditions.

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