Sifting the Gene Pool

 | Oct 10, 2011 | 7:45 AM EDT  | Comments
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Stock quotes in this article:

stx

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mat

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lo

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rost

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tgt

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tjx

Two years ago, I had a good friend suggest an exercise in finding some companies that had the "genetic makeup" to withstand recessions. Any of us investment types can offer the rules of thumb about defensive groups, whose economic volatility we know from experience. He wanted a quantitative exercise, however, and it turned up some surprising names. As the U.S. possibly teeters on the brink of another recession, now is a good time to revisit the idea.

But this time I modified my test to look at dividends rather my previous parameters, which were a mix of earnings and stock price. Cash is always king, and regular readers know I am a huge proponent of putting income into your investment mix. Substantial academic research also supports the idea that companies which regularly raise their dividend perform better over time.

The companies I wanted were those that meaningfully raised their dividends over the past three years, despite horrible economic conditions. Companies that have managed to increase cash flow and pay it out are a good bet to continue to do so, even if our economy takes a turn for the worse this winter.

So I fired up my trusty Factset and screened for companies whose dividends now are at least 100% higher than in spring 2008. (Don't ever say I am not a demanding investor.) Additionally, the names had to yield more than 1% then and now -- we don't need to see a name that went from $0.01 to $0.02, which does nothing for us.

The result is this table of 29 names. In a counterintuitive development, they cover almost every industry group.

 

Stocks With Big Dividend Boosts During Recession

 

While all are good candidates for further research, some stand out to me:

Seagate Technology (STX) is levered to PC units, and has struggled lately, but the drive business is consolidating, and that nearly 7% yield can cushion the wait for better pricing and volumes due to reduced competition.

Mattel (MAT) always stands out to me because I have two young girls. I understand the crack-like power of their brands, notably Barbie and American Girl.

Lorillard (LO) is an easy one, since I am a fan of the tobacco industry. Tobacco is sufficiently addictive, and with less political risk than ever since the settlement recipients packaged and sold the settlement revenue streams, now government is addicted too.

Ross (ROST), Target (TGT), and TJX (TJX) are all "inferior goods" that can benefit in a slowing economy, as folks trade down -- yet again.

The rails have pricing power, as Warren Buffett figured out a couple years ago, since they have an irreplaceable asset (rights of way) and compelling cost advantages versus truckload shipping.

As always, use this list as a starting point for further research, not the completion of it!

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