After consumer inflation frightened investors and sent markets down earlier in the week, we now fear that the Fed will raise interest rates too far and too quickly, sending us into a recession.
So, where should investors put their money if they think a recession is on the way?
One area that 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 enabled decades of dividend growth.
Three of our favorite blue chip food supplies are:
Hormel Foods Corporation (HRL)
Kellogg Company (K)
JM Smucker Company (SJM)
Let’s bite into it now:
Hunger for Hormel
Hormel has been in business since the late 1800s and has always focused on pork products, which set it apart from its competitors. Hormel, for example, produced the world’s first canned ham in 1926.
Today, Hormel’s portfolio also includes Hormel, Spam, Skippy peanut butter, Jennie-O turkey products and Applegate.
While brands like Spam and Applegate are still important to the company, the company has moved to diversify its product range from processed meats in order to gain greater market share.
For example, in early June 2021, Hormel completed the purchase of the snack portfolio Planters worth $3.35 billion from Kraft Heinz Company (KHC). This was no small addition to the company. Planters generated approximately $1.1 billion in annual revenue the year before the acquisition was completed. At the same time, Hormel’s annual revenue was $9.5 billion.
The move to move away from primarily processed meats has enabled Hormel to compete successfully in a number of categories within the food industry. These categories are also very stable and the pricing makes them affordable for many consumers, helping to sustain demand even during economic downturns.
This is a major factor in why Hormel’s earnings per share grew nearly 17% over the 2007-2009 period. The dividend also grew by 27% in the same period. The stock also outperformed the S&P 500 this year, dropping 5.9% year-to-date compared to a 17% drop for the index.
Hormel’s business model has provided slow and steady growth for decades, which is why the company has increased its dividend for 56 consecutive years. The dividend has grown at a compound annual growth rate (CAGR) of 14% over the past ten years, but that growth rate has slowed slightly in recent years.
Yet this Dividend king has an expected payout ratio of 56% for 2022, making it likely that the dividend will continue to grow in the future. Equities return 2.3%, a superior figure compared to the average return of 1.6% for the S&P 500.
Next up is Kellogg, who has his 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 grain industry and has 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 a mainstay in supermarket 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 made an effort to provide healthier food options. This includes plant-based proteins from Morningstar Farms, Pure Organic fruit bars, Smart Start cereals, and Kashi breakfast options and snacks. This has helped the company appeal to the more health-conscious consumer.
Kellogg weathered the Great Recession well, with earnings per share growing 14.5% from 2007 to 2009. Shareholders received a total dividend increase of more than 19% during this period. So the stock was an outlier in 2022 as it gained 9.5% so far.
More recently, Kellogg has announced major changes to his 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 the business, including a global snack company, a North American grain company and a plant company. These companies generate annual revenues of $11.4 billion, $2.4 billion, and $340 million, respectively. We to believe that the individual companies will be able to outperform what Kellogg could produce as a single entity, as each will now focus on what they do best.
While the spin-off should be good for shareholders, it remains to be seen what will happen to Kellogg’s dividend. That said, the company has increased its dividend for 18 consecutive years and has a reasonably expected payout ratio of 57%. The dividend has grown at a CAGR of just over 3% since 2012, but the stock offers a solid 3.4% return, more than double that of the S&P 500.
JM Smucker Up
Our last name to consider is JM Smucker, founded in 1897 and today a leading manufacturer of foods and beverages.
JM Smucker started 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 of brands known and trusted by consumers around the world. This includes Smucker’s brand of the same name, 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 JM Smucker to compete in a number of categories, providing diversified revenue streams and protecting the company in the event of difficulties in a particular area.
This happened recently when JM Smucker had to recall a significant portion of its Jif peanut butter due to salmonella positioning. As a result, the company had to stop production. This drove a 9% drop in volume in the most recent quarter, but organic sales still improved 4% as a result of price increases, demonstrating the popularity of products and JM Smucker’s ability to pass on rising costs.
The strength of JM Smucker’s portfolio played a key role in the company’s ability to grow its earnings per share by 39% over the period 2007-2009. The company increased its dividend by 19% during the period. The stock has bounced back just over 2% since the start of the year, but this is significantly ahead of the market.
JM Smucker has been driving a dividend hike for 26 years and qualifies the company as a dividend champion. Over the past decade, the dividend has grown at a CAGR of 7.4%. The dividend payout ratio is expected to be 57% for the year, while shares of JM Smucker yield just under 3%.
With inflation continuing to rise, there is a good chance that the Federal Reserve’s action will continue. This increases the chance that the Fed will cool the economy too quickly and a recession will take place.
Hormel, Kellogg and JM Smucker are three stocks that have performed very well under duress as demand for their products remains even when the economy falters. Each name grew in earnings per share over the past recession period, while shareholders received dividend increases at the same time.
For investors looking to recession-proof their portfolio and find names that will drive growth and income, we recommend considering one of these names to buy.
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