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3 Dividend Kings To Outlast A Recession
The recent market plunge and coronavirus outbreak are clear signals that the U.S. is about to enter a recession, or is already in a recession. While most stocks will decline at least somewhat in a bear market, not all stocks are doomed. In times like this, investors should try to selectively own stocks that are most likely to outlast a recession. These are stocks that have durable competitive advantages, can remain profitable even in an economic downturn, and have the ability to continue paying dividends.
For these reasons, we believe long-term investors should consider the Dividend Kings, an exclusive group of stocks that have each raised their dividends for at least 50 consecutive years. These companies have outlasted previous downturns, and will do so again if the global economy enters a recession. Specifically, we believe three Dividend Kings in particular are uniquely equipped to navigate a recession caused by coronavirus.
Dividend King #1: Johnson & Johnson (JNJ)
Johnson & Johnson is one of the most popular and well-known dividend growth stocks in the entire stock market, and for good reason. It is a legendary dividend growth stock, as it has increased its dividend for 57 consecutive years, including a nearly 6% increase in 2019.
It has maintained such a long history of annual dividend increases because of its diversified business model. It is a leader in the healthcare sector across three core segments—pharmaceuticals, medical devices, and consumer products. Just a few of its well-known consumer brands include Band-Aid, Listerine, and Neutrogena. All told, the company generates annual sales of more than $85 billion.
Johnson & Johnson reported earnings results for the fourth quarter and full year results on 1/22/2020. Adjusted operational sales, which excludes the impacts of various non-recurring items such as divestitures and currency fluctuations, increased 4.5% for the full year. All three of Johnson & Johnson’s operating segments posted operational sales growth in 2019, including 1.4% consumer growth, 5.8% pharmaceutical growth, and 3.9% medical devices growth. Adjusted earnings-per-share increased 6.1% in 2019, due to revenue growth and share repurchases.
Johnson & Johnson has a current dividend yield of 3%, which exceeds the ~2.4% average yield of the S&P 500 Index. And, the company provides annual dividend increases that are well above the rate of inflation. As a result, Johnson & Johnson stock is an excellent mix of dividend yield and growth.
Dividend King #2: Colgate-Palmolive (CL)
Colgate-Palmolive has been in existence for over 200 years. It operates in many consumer staple markets including Oral Care, Personal Care, Home Care and more recently, Pet Nutrition. The company generates more than $16 billion in annual revenue.
Colgate-Palmolive reported Q4 and full-year earnings on January 31st and results beat expectations for both revenue and profit. Reported net income and diluted earnings-per-share came to $643 million and $0.75, respectively, compared to $606 million and $0.70 in the year-ago period. On an adjusted basis, which excludes certain costs and gains, net income was down -2% year-over-year while earnings-per-share declined -1%.
However, Colgate-Palmolive reported organic sales rose an impressive 5% in Q4 thanks to all of its regions outside of North America posting gains of at least 6%. North America was up just 1.5% in Q4. Gross margin was 60.1% in Q4, up from 59.1% in the year-ago period. However, excluding charges from the company’s cost savings program, gross margins were up 80bps year-over-year to 60.2% of revenue. The company expects organic sales growth of 3% to 5% this year for total revenue growth of 4% to 6%.
Colgate-Palmolive has a highly impressive dividend history. It has paid uninterrupted dividends on its common stock since 1895, and has increased payments to common shareholders every year for 57 years. Its most recent dividend increase was a 2.3% raise in March 2020. The stock has a current yield of 2.6%, and a highly secure payout with a projected dividend payout ratio of 57%.
Colgate-Palmolive should fare much better than many other companies in the event of a coronavirus-related economic downturn. Consumer products such as soap and toothpaste will hold up very well, even in a recession.
Dividend King #3: SJW Group (SJW)
SJW Group is a water utility company that produces, purchases, stores, purifies and distributes water to consumers and businesses in the Silicon Valley area of California, and the area north of San Antonio, Texas. SJW Group has a small real estate division that owns and develops properties for residential and warehouse customers in California and Tennessee.
The company generates $420+ million in annual revenue. On October 9th, 2019 SJW Group and Connecticut Water Service announced that their merger was completed. The combined company is the second-largest public pure play water and wastewater utility company in the U.S. SJW Group will serve almost 1.5 million customers in California, Connecticut, Maine and Texas.
SJW Group released earnings results for the fourth quarter and full year on 2/27/2020. For the year, adjusted earnings declined 29% to $1.78, while revenue increased 5.7% to $420.5 million. Earnings-per-share for 2019 included a $0.72 impairment due to costs related to the merger with CTWS and a $0.24 impairment due to changes in revenue recognition. The majority of revenue growth in the fourth quarter was due to the completed merger with CTWS, but SJW Group benefited from higher customer usage and an increase in water rates as well.
Like Johnson & Johnson and Colgate-Palmolive, SJW Group has a very impressive dividend history. Dividends have been paid for 305 consecutive quarters and the annual dividend has been increased for 52 consecutive years. The company recently increased its dividend by 6.7%, and the stock has an attractive yield of 2.3%. SJW does not have the highest yield in the stock market, but it makes up for this with excellent dividend consistency and annual increases.
Water is a basic necessity of human life. This gives investors a great deal of certainty as to the company’s future profits and dividends. Even in the worst-case economic scenario, consumers cannot go without water service.
The punishing market sell-off in the past several weeks could be a signal of an upcoming recession. If the sell-off continues, income investors should focus on high-quality dividend stocks that have durable competitive advantages and the ability to raise dividends each year, regardless of the state of the economy.
The three companies mentioned in this article have strong business models and leadership positions in their respective industries. Moreover, they manufacture and sell products that people will always need, even in the deepest recession or if the coronavirus outbreak results in a complete lockdown. Consumers will still demand healthcare, consumer staples, and water, no matter how deep the recession gets.
As a result, risk-averse income investors such as retirees, who are looking for solid dividend yields (and more importantly secure dividend payouts) should start with Johnson & Johnson, Colgate-Palmolive, and SJW Group.