After the consumer inflation number spooked investors and sent markets lower earlier in the week, we now have fears that the Fed will raise interest rates too quickly, pushing us into a recession.
So where should investors put their money if they think a recession is around the corner?
One sector we believe will perform well even in an economic downturn is the food industry, which is crowded high value stocks which 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 foods include:
Hormel Foods Corporation (HRL)
Kellogg Company (K)
JM Smucker Company (SJM)
Let’s pinch them now:
Hungry for Hormel
In business since the late 1800s, Hormel has always focused on pork products, which set it apart 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 remain important to the business, the company has moved to diversify its product line 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 2021. That was no small addition for the company. Planters generated about $1.1 billion in annual revenue in the year before the acquisition closed. At the same time, Hormel’s annual revenue was $9.5 billion.
Moves to offer products away from primarily processed meats have allowed Hormel to compete successfully in several categories in the food industry. These categories are also very stable and the pricing makes them affordable to many consumers, which helps maintain demand even during economic downturns.
This is the major factor why Hormel’s earnings per share increased by almost 17% for the period 2007-2009. The dividend increased by 27% over the same period. The stock has also outperformed the S&P 500 this year, falling 5.9% year-to-date compared with a 17% drop for the index.
Hormel’s business model has predicted slow and steady growth for decades, which is why the company has raised its dividend for 56 consecutive years. The dividend has grown at a compound annual growth rate (CAGR) of 14% over the past decade, but that growth rate has slowed slightly in recent years.
Still, this Dividend King it has a forecast payout ratio of 56% for 2022, making it likely that the dividend will continue to grow in the future. The stock is yielding 2.3%, higher than the 1.6% average return for the S&P 500.
Next is Kellogg, which has its own unique story. The company was founded in 1906 and, over time, became a leader in the processed food industry.
Kellogg has long been a leading name in the cereal space, with 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 aisles and food pantries for generations.
The company’s other brands include Eggo, Pringles, Pop-Tarts and Town House waffles. Kellogg has also paid attention to changing consumer preferences and has made efforts to provide healthier food options. This includes Morningstar Farms plant-based proteins, Pure Organic fruit bars, Smart Start cereals and Kashi breakfast options and snack bars. This has helped the company appeal to the more health conscious consumer.
Kellogg weathered the Great Recession well, and earnings per share grew 14.5% from 2007 to 2009. Shareholders received a total dividend increase of more than 19% during that period. Thus, the stock has been an outlier for 2022 as it is up 9.5% year-to-date.
More recently, Kellogg announced major changes to its company. On June 21 of this year, Kellogg was 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 cereal company and a plants company. These businesses generate annual revenues of $11.4 billion, $2.4 billion and $340 million, respectively. We believe that the separate companies will be able to perform better than Kellogg could produce as a single entity, since each will now focus on what it does best.
While the spinoff will be good for shareholders, it remains to be seen what will happen to Kellogg’s dividend. That said, the company has raised 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 double that of the S&P 500.
JM Smucker Up
Our final name to consider is JM Smucker, which was founded in 1897 and is today a leading manufacturer of food and beverage products.
JM Smucker began 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 consisting of brands that are known and trusted by consumers around the world. This includes Smucker’s namesake 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 JM Smucker to compete in several categories, providing diversified sources of revenue and protecting the company in the event of difficulty in a particular sector.
This happened recently as JM Smucker was forced to recall a significant portion of Jif peanut butter due to salmonella contamination. As a result, the company was forced to stop production. That led to a 9% decline in volume in the most recent quarter, but organic sales still improved 4% due to price increases, demonstrating the product’s popularity and JM Smucker’s ability to pass on rising costs.
The strength of JM Smucker’s portfolio was instrumental in the company’s ability to increase earnings per share by 39% for 2007-2009. The company increased its dividend by 19% during the period. The stock has returned just over 2% year-to-date, but that’s significantly ahead of the market.
JM Smucker has provided dividend growth for 26 years, designating 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 JM Smucker stock yields just under 3%.
As inflation continues to rise, the likelihood of continued Federal Reserve action is high. This increases the chances that the Fed will cool the economy too quickly and a recession will occur.
Hormel, Kellogg, and JM Smucker are three stocks that perform very well under pressure, as their products remain in demand even when the economy is down. Each name grew EPS in the last recession while simultaneously providing shareholders with dividend increases.
For investors looking to weather the downturn in their portfolio and find names that provide growth and income, we suggest considering any of these names for purchase.
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