During Recessions, These Dividend Stocks Can Be Your Bread and Butter

After the consumer inflation number spooked investors and sent markets lower earlier in the week, we now have fears the Fed will be hiking interest rates too far too fast, pushing us into a recession.

So, where should investors put their money if they think a downturn is around the corner?

One area we believe will perform well even in an economic downturn is the food industry, which is full of blue chip stocks that have performed well in several recessions, thanks to their strong business models that have allowed for decades of dividend growth.

Three of our favorite blue chip food stocks include:

• Hormel Foods Corporation (HRL)

• Kellogg Company (K)

• J.M. Smucker Company (SJM)

Let’s bite into them now:

Hungry for Hormel

In business since the late 1800s, Hormel has always focused on pork products, which separated it from its peers. For example, Hormel produced the world’s first canned ham in 1926.

Today, Hormel’s portfolio also consists of Hormel, Spam, Skippy peanut butter, Jennie-O turkey products, and Applegate, among others.

While brands such as Spam and Applegate are still important to the business, the company has moved to diversify its product lineup away from processed meats in order to capture a wider market share.

For example, Hormel completed its $3.35 billion purchase of the Planters snack portfolio from Kraft Heinz Company (KHC)  in early June of 2021. This was no small addition for the company. Planters generates approximately $1.1 billion of annual revenue the year before the acquisition closed. At the same time, Hormel’s annual revenue was $9.5 billion.

The moves to offer products away from primarily processed meats has allowed Hormel to compete successfully in a number of categories within the food industry. These categories are also very stable and pricing makes them affordable to many consumers, which helps to keep demand up even during economic downturns.

This is major factor why Hormel’s earnings per share grew almost 17% for the 2007 to 2009 time period. The dividend grew 27% during that same time as well. The stock has also outperformed the S&P 500 this year, dropping 5.9% year-to-date compared to a 17% decline for the index.

Hormel’s business model has provided for slow and steady growth for decades, which is why the company has raised its dividend for 56 consecutive years. The dividend has increased with a compound annual growth rate (CAGR) of 14% over the last decade, but that growth rate has slowed slightly in recent years.

Still, this Dividend King has a projected payout ratio of 56% for 2022, making it likely that the dividend will continue to grow going forward. Shares yield 2.3%, a superior figure compared to the average yield of 1.6% for the S&P 500.

Kellogg Can

Next up is Kellogg, which has its only storied history. The company was founded in 1906 and, over time, has become a leader in the processed food industry.

Kellogg has long been a top name in the cereal aisle, holding more than 30 such brands in its portfolio. The company’s best-selling cereals include Raisin Bran, Fruit Loops, Frosted Flakes, Special K, and Rice Krispies. These brands have been mainstays in grocery aisles and pantries for generations.

The company’s other brands include Eggo waffles, Pringles, Pop-Tarts, and Town House. Kellogg has also paid attention to changing consumer tastes and has made efforts to provide healthier food options. This includes Morningstar Farms plant-based proteins, Pure Organic fruit bars, Smart Start cereal, and Kashi breakfast options and snack bars. This has helped the company appeal to the more health-conscious consumer.

Kellogg navigated the Great Recession well as earnings-per-share grew 14.5% from 2007 to 2009. Shareholders received a total dividend increase of more than 19% during this time. The stock has been an outlier thus in 2022 as it as gained 9.5% year-to-date.

More recently, Kellogg has announced major changes to its company. On June 21 of this year, Kellogg announced that it would split its company into three separate publicly traded entities. The three new companies will each focus on a different aspect of business, including a global snacking company, a North American cereal company, and a plant company. These businesses generate annual revenue of $11.4 billion, $2.4 billion, and $340 million, respectively. We believe that the separate companies will be able to outperform what Kellogg could produce as a single entity as each will now focus on what it does best.

While the spinoff off should be good for shareholders, it remains to be seen what happens to Kellogg’s dividend. That said, the company has increased its dividend for 18 consecutive years and has a reasonable expected payout ratio of 57%. The dividend has a CAGR of just over 3% since 2012, but the stock offers a solid yield of 3.4%, more than twice that of the S&P 500.

J.M. Smucker Up

Our final name for consideration is J.M. Smucker, which was founded in 1897 and today is a leading manufacturer of food and beverages products.

J.M. Smucker started off making and distributing apple cider and apple butter. Over time, the company expanded and became a powerhouse in its industry. The company now has a portfolio composed of brands that are well-known and trusted by consumers all over the world. This includes the namesake Smucker’s brand, Jif peanut butter, and Folgers coffee to name a few. The company also has some very popular pet food brands, including Meow Mix, Kibbles ‘n Bits, 9Lives, and Milk-Bone.

The wide variety of products allows J.M. Smucker to compete in a number of categories, providing diversified sources of revenue and protects the company in case of difficulty in a certain area.

This recently came to pass as J.M. Smucker had to recall a sizeable portion of its Jif peanut butter due to salmonella positioning. The company had to shut down manufacturing as a result. This drove a 9% decline in volume in the most recent quarter, but organic sales still improved 4% due to price increases, demonstrating the popularity of products and J.M. Smucker’s ability to pass along rising costs.

J.M. Smucker’s portfolio strength played a key role in the company’s ability to grow earnings-per-share by 39% for the 2007 to 2009 period. The company grew its dividend 19% during the period. The stock has returned just a little more than 2% year-to-date, but this is significantly ahead of the market.

J.M. Smucker has provided a dividend increase for 26 years, qualifying the company as a Dividend Champion. Over the last decade, the dividend has a CAGR of 7.4%. The dividend payout ratio is expected to be 57% for the year while shares of J.M. Smucker yield just under 3%.

With inflation continuing to run hot, the likelihood of continued Federal Reserve action is high. This increases the chances that the Fed cools the economy too quickly and a recession takes place.

Hormel, Kellogg, and J.M. Smucker are three stocks that have performed very well under duress as their products remain in demand even as the economy falters. Each name grew EPS in the last recessionary period while at the same time providing shareholders with dividend increases.

For investors wanting to recession-proof their portfolio and find names that provide growth and income, we suggest they consider any of these names for purchase.