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The U.S. economy got off to a very rough start in 2020. After a decade-long economic expansion following the Great Recession of 2008 to 2010, the U.S. fell into a recession due to the novel coronavirus. Economic growth bounced back in the third quarter, which gave investors hope that the recession would be short-lived.
But a resurgence in coronavirus cases around the country sparked fears of a double-dip recession. The stock market roared back over the past several months, completely wiping out the coronavirus-induced losses in April. These gains could vanish if the U.S. economy enters another recession. For this reason, investors may want to position their portfolios more defensively by focusing on high-quality dividend stocks.
The following three dividend stocks pay shareholders and increased their dividends each year for decades. They continued to raise their dividend payouts every year, regardless of the state of the broader economy.
- Hormel Foods (NYSE:HRL)
- PepsiCo (NASDAQ:PEP)
- American States Water (NYSE:AWR)
Recession-Proof Dividend Stocks: Hormel Foods (HRL)
Hormel is a food manufacturer with a large portfolio of popular brands. Hormel Foods was founded back in 1891. Since that time, the company grew into a large-cap stock with a market cap of $28 billion market capitalization with nearly $10 billion in annual revenue. Hormel kept with its core competency as a processor of meat products for well over 100 years, but also expanded into other business lines through acquisitions. Some of its core brands include Skippy, SPAM, Applegate, Justin’s and more than 30 others.
Hormel reported third-quarter earnings with results coming in about as expected on the top and bottom lines. Volumes in the third quarter rose 4%, with organic volume rising 3%. Organic revenue was up 2%. Grocery products revenue increased 7% to $581 million, while refrigerated foods segment revenue rose 5%. Hormel Foods benefited from consumers stockpiling their pantries during the pandemic. US.. net retail sales increased 19% for the quarter, offsetting a 19% decline in food service net sales.
Hormel achieved 10% compound annual earnings-per-share growth in the past decade. It also maintained a proven track record of stable profits during recessions. Hormel increased its earnings in 29 out of the last 34 years. The company increased its dividend for 54 consecutive years, placing it on the exclusive list of Dividend Kings.
Hormel’s brand portfolio skews defensive, meaning it has multiple products that see demand increase during a recession. The company owns a number of growth brands that cater to the health and wellness trend, but Hormel balances this with a few canned, shelf-stable food brands that hold up extremely well when consumers are tightening their belts.
The company’s competitive advantage is its strong brand portfolio. According to the company, Hormel possesses the No. 1 or 2 market position in more than 40 product categories. Its market leadership and number of brands that hold up very well in a recession make Hormel an ideal stock to hold during a recession.
Like Hormel, PepsiCo is a giant food company with a diversified product line and a long history of dividend increases. PepsiCo is a global food and beverage giant that generates $68 billion in annual sales. PepsiCo has a very recession-resilient business model, due to its world-class brands and also its diversified business model that is roughly evenly split between food and beverages. The company’s core brands include Pepsi, Mountain Dew, Frito-Lay, Gatorade, Tropicana, Quaker and more. PepsiCo owns 23 brands that each generate at least $1 billion in annual sales. This provides the company with steady sales and profits, even during recessions.
In the most recent quarter, PepsiCo’s revenue increased 5.2% to $18.1 billion, coming in $850 million ahead of estimates. Adjusted earnings-per-share rose 6.4% to $1.66, which was also higher than analysts had expected. Organic revenue growth was a very solid 4.2% for the quarter. Nearly every segment of the company contributed to growth. Snack and foods remained strong, with organic revenues climbing 6% and volumes up 3%. Organic growth for beverage was 3% and volumes improved 1%.
PepsiCo also operates a geographically diversified business, and an entrenched position in the emerging markets which should provide long-term growth. Economies in the under-developed world are growing at a faster rate than many developed nations. For example, last quarter PepsiCo’s Africa/Middle East/South Asia segment generated revenue growth of 31%, while its Asia Pacific/Australia/New Zealand/China experienced 15% revenue growth.
PepsiCo reinstated guidance for 2020 and now expects organic revenue growth of 4% and core earnings-per-share of $5.50. Despite the extremely difficult conditions, 2020 is expected to be another year of revenue growth and high profits, which allows PepsiCo to return cash to shareholders. PepsiCo also expects to return $7.5 billion of capital to shareholders, including $5.5 billion of dividends in 2020.
PepsiCo increased its dividend for 48 years in a row, including a solid 7% increase in 2020. This is a very healthy raise, considering the deep recession this year. PepsiCo stock currently yields 2.9%, which is significantly above the average yield of the S&P 500.
American States Water (AWR)
American States Water is not a household name, and probably flies under the radar of many income investors. It is a water utility, which is arguably the most recession-resistant industry in the entire economy. This is because water is a basic necessity of life, and this simple fact provides the company with steady demand from year to year. Even in the worst economic recession, everyone will still need water.
American States Water operates two business units: utilities (primarily water, some electricity) and services (wastewater services on several U.S. military bases).
American States Water reported its third-quarter results which once again showed stability in the face of a difficult operating climate. Consolidated diluted EPS increased 4.3% from the same quarter last year. Earnings-per-share in the core water utility segment increased 7.5% for the quarter, boosted by favorable rate outcomes.
The company continues to weather the Covid-19 environment well due to its stable, mission-critical business model. It has a virtually guaranteed growth stream through population growth and rate increases. Naturally, this growth flows to investors in the form of higher dividends each year. American States Water is a Dividend King, which means it has 50-plus years of rising dividends. In fact, it increased dividends for 66 consecutive years.
The company’s current policy is to achieve a compound annual dividend growth rate of more than 7% over the long-term. Along with third-quarter results, American States Water approved a 10% increase in the third-quarter dividend. American States Water stock has a relatively low current yield of 1.8%, which is roughly on par with the S&P 500 Index average yield. But the company makes up for this with high dividend growth from year to year.
Utilities are not cyclical, and due to the decades-long contract durations with the U.S. military, the services business is not cyclical either. American States Water is therefore quite recession-proof. There is a low risk of an earnings decline, shown by the fact that even during the last financial crisis, profits kept increasing. Competition is not a major issue as the company operates with very long-term contracts. As a result, investors can expect continued dividend increases each year, regardless of how bad the economy gets.
On the date of publication, Bob Ciura was long PEP stock. He did not have (either directly or indirectly) any positions in the other 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.