When recession strikes, cyclical companies with riskier earnings streams tend to struggle -- so sectors like technology and consumer discretionary tend to perform poorly, while sectors like consumer staples could outperform. Why? The latter has more reliable earnings streams.
For dividend investors this is important, because reliable earnings streams generally equal reliable dividend payments. The following three food stocks generate steady earnings and pay reliable dividends, even during recessions.
Refining Strategy: General Mills
General Mills (GIS) is a packaged food giant, with more than 100 brands and operations in more than 100 countries. It has a market capitalization of $50 billion. General Mills has not cut its dividend for 122 consecutive years. The company has returned to growth mode in the last four years, mostly thanks to the acquisition of Blue Buffalo and the pandemic, which has greatly increased food consumption at home.
It has continued to generate growth in the current climate. In late March, General Mills reported financial results for the third quarter of fiscal 2023, revealing net sales and organic sales grew 13% and 16%, respectively, over the prior year's quarter thanks to strong price hikes in all segments. Volumes remained flat despite the strong price hikes. Gross margin expanded from 31.4% to 33.8%, as higher prices more than offset cost inflation, and earnings per share grew 17%, from $0.83 to $0.97, and beat the analysts' consensus by $0.04. General Mills posted excellent results despite cost inflation, thus proving the strength of its brands. Thanks to strong price hikes, it raised its guidance for organic revenue growth for a third quarter in a row, from 8%-9% to 10%- 11% and growth of earnings-per-share from 4%-6% to 8%-9%, in fiscal 2023.
Due to the acquisition of Blue Buffalo, the debt load of General Mills increased materially. In fiscal 2019, interest expense jumped 40% due to this acquisition, from $374 million to $522 million. But the company has reduced its debt at a fast pace since then and thus its annual interest expense has returned close to pre-acquisition level, at $380 million. In fiscal 2022, interest expense decreased 10%, from $420 million to $380 million, and boosted pre-tax income by 1.3%.
Moreover, the stock has proven resilient during recessions and market selloffs because people tend to eat at home more during difficult economic periods. In the Great Recession, while most companies saw their earnings collapse, General Mills grew its earnings-per-share by more than 10% per year from 2007 to 2010. In the coronavirus pandemic, General Mills proved its resilience once again, as it posted record earnings in fiscal 2020, 2021 and 2022.
The stock has a payout ratio of 51%, indicating a safe dividend. Shares currently yield 2.4%.
The Cat's Meow: JM Smucker
J.M. Smucker (SJM) company has grown into an international powerhouse of packaged food and beverage products including iconic names like Smucker's, Jif and Folgers, along with pet food brands like Milk Bone, Meow Mix, Kibbles 'n Bits and 9Lives. The company has a market capitalization of $16 billion and generated $8 billion in sales last year.
In late February, Smucker's reported financial results for the third quarter of fiscal 2023, showing that sales grew 8% and organic sales grew 11% over the prior year's quarter. This growth was thanks to 15% price hikes, which more than offset a 4% decrease in volumes. Adjusted EPS decreased 5%, from $2.33 to $2.21, but exceeded the analysts' estimates by $0.08, as price hikes nearly offset the increased costs of commodities, ingredients, manufacturing, and packaging costs.
Thanks to better-than-expected results and positive business trends, Smucker's slightly improved its outlook for fiscal 2023. The company now expects sales growth of 6.0% (vs. 5.5%-6.5% previously) and adjusted earnings-per-share of $8.55-$8.75 (vs. $8.35-$8.75 previously).
Smucker's iconic brands continue to enjoy recognition. During the last recession of 2008-2009, Smucker's held up exceptionally well, growing both earnings and dividends during that time. The company has been working towards growth, mostly via acquisitions. This has levered up the balance sheet, but leverage remains under control. Smucker's has net debt of $7.0 billion, which is less than half of the market capitalization of the stock.
The company also has an interest coverage ratio of 7.1, which is healthy. In addition, the 2.6% dividend is safe, given the decent payout ratio of 57% and the resilience of the company to recessions.
A Healthy Choice: ConAgra Brands
Conagra (CAG) has well-known brands like Slim Jim, Healthy Choice, Marie Callender's, Orville Redenbacher's, Reddi Whip, Birds Eye, Vlasic, Hunt's, and PAM.
The company is performing well in the current environment. On April 5th, 2023, Conagra reported third quarter fiscal 2023 results for the period ending Feb. 26, 2023. (Conagra's fiscal year ends the last Sunday in May). For the quarter, net sales increased 5.9% to $3.1 billion, due to an increase in organic sales, offset by an unfavorable exchange impact. Compared to Q3 fiscal year 2022, organic net sales were up 6.1%.
Adjusted net income increased 31% to $366 million, or $0.76 per share. Conagra updated its fiscal 2023 guidance. The company expects 7.0% to 7.5% organic sales growth and adjusted earnings-per-share growth of between 14% and 17% (up from 10% and 14% previously) over fiscal 2022.
From 2019 to 2022, Conagra saw a terrific boon to its results due to the Covid-19 pandemic, with adjusted EPS jumping 13% in fiscal 2020 and 16% in fiscal 2021. Further, the dividend was increased significantly to reflect these results. But this appeared to be a short-term benefit, as results were down in fiscal 2022. Based on the strong first three quarters of fiscal 2023, though, Conagra is expecting to surpass its 2021 adjusted EPS peak.
Conagra's competitive advantage lies in its brand strength. The quality of this advantage has been called into question as consumer preferences are changing. However, Conagra performed exceptionally well amid the pandemic. The company has a 2023 dividend payout ratio just below 50% for the current fiscal year, indicating a safe dividend payout. The stock has a 3.5% dividend yield.