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The 10 Most Recession-Proof Dividend Aristocrats

Published August 26th, 2015

Investors are panicking. The stock market is in free-fall. Now is a good time to insulate your portfolio against the worst effects of recessions.

Unfortunately, most investors don’t know about the market-beating returns of Dividend Aristocrats during recessions. In 2008, the S&P 500 fell around 37%. The Dividend Aristocrats Index fell about 22% by comparison.

The Dividend Aristocrats Index is comprised of 52 businesses that have 25 or more consecutive years of dividend increases. A business simply must have a strong competitive advantage and fairly stable cash flows to give investors 25 years of rising dividends.

The Dividend Aristocrats Index is filled with businesses that are able to pay rising dividends regardless of the global economy. Of course, some of these businesses do better during recessions than others. Click here to see a list of all 52 Dividend Aristocrats.

We are lucky in that the last large recession ended just 6 years ago. There is plenty of recent data that can inform us of the type of businesses that do well during recessions.

This article examines the Top 10 most recession proof Dividend Aristocrats. All 52 current Dividend Aristocrats were ranked using a combination of largest maximum drawdown during the Great Recession, and total return from 2007 through 2009. The 10 most recession proof Dividend Aristocrats re examined below:

#10 – Clorox

Clorox (CLX) is a branded consumer goods company with a market cap of $14.1 billion. The company owns many well-known brands, including: Clorox Bleach, Pine-Sol, Hidden Valley Ranch Dressing, Brita water filters, Burt’s Bees natural products, Glad trash bags, Kingsford charcoal, and Fresh Step cat litter.

The company has paid increasing dividends for 38 consecutive years. Selling staple household products that require consumers to constantly repurchase is a consistent money making business.

Clorox performed well over the Great Recession of 2007 to 2009. The company managed to increase earnings-per-share each year through the Great Recession, as shown below:

While Clorox has performed well through recessions, the company appears overpriced at this time. Clorox currently has a price-to-earnings multiple of 23.5 – yet has barely managed to grow earnings-per-share in the past 5 years. In 2010, Clorox had earnings-per-share of $4.24… For the full fiscal year 2014, earnings-per-share were $4.26.

The company has struggled to grow due to competition from store-brand products. Why buy Glad trash bags when a very similar trash bag is available right next to it for a much lower price? Competitive pressure has actually made net profit fall from a high of $603 million in 2010 to $562 million in fiscal 2014. Earnings-per-share have grown due to strong share repurchases, but Clorox as a business is very slowly shrinking.

This doesn’t mean the company is doomed – or that shareholders will see negative total returns (thanks to dividends and share repurchases), but it does make Clorox look significantly overvalued at its current price-to-earnings ratio of 23.5.

#9 – Automatic Data Processing

It is true that businesses lay off workers during recessions. Of course, not all workers are laid off. No matter the economic environment, businesses must process payroll.

That’s what makes Automatic Data Processing (ADP) so resilient. The company’s primary service is a necessity for the businesses it serves. Automatic Data Processing provides payroll, human resources, and tax software and services to over 620,000 customers in 125 countries.

Automatic Data Processing is one of the few businesses that managed to grow earnings-per-share each year through the Great Recession of 2007 to 2009. The company’s earnings-per-share during this time are shown below:

The human resources services Automatic Data Processing provides its customers are too important to cut back on during recessions. This keeps the company’s earnings up regardless of the overall economic climate. The Great Recession is not the first recession through which Automatic Data Processing has grown. The company has paid increasing dividends for… 40 consecutive years.

Over the last decade, Automatic Data Processing has compounded its earnings-per-share at an annual rate of 6.3%. Dividends have grown much faster, at an annual rate of 13.3% a year. The company currently has a payout ratio of 63%, so future dividend growth should be closer in line to earnings-per-share growth.

Automatic Data Processing’s growth going forward will come from overall economic growth and increased need for human resource services due to ever-growing regulation from the government.   When small businesses feel they cannot keep up with increased regulatory burdens, Automatic Data Processing is there to help (for a price, of course).

Despite its reliable growth driver (increasing government regulation), and its long history of growth and recession resistance, Automatic Data Processing stock has one drawback – it is trading at a price-to-earnings ratio of 25.4, well above the S&P 500’s current price-to-earnings ratio of 18.8.

#8 – Johnson & Johnson

Johnson & Johnson (JNJ) could have the best record of consistency of any publicly traded corporation.

The company has paid increasing dividends for 53 consecutive years, and has 31 consecutive years of adjusted earnings-per-share growth.

As one would expect from such a stable business, Johnson & Johnson marched through the Great Recession of 2007 to 2009 without missing a beat. The company saw earnings-per-share grow each year of the Great Recession:

What is interesting to me is that Johnson & Johnson had a maximum drawdown of 34.4% during the Great Recession… And yet its earnings kept climbing higher. This is very clear evidence of overreaction during recessions.

Investors will often sell exceptional businesses that will only be minimally effected by economic declines during recessions. This creates opportunities for less spooked investors to own shares of truly high quality companies for bargain prices. There is simply no reason Johnson & Johnson’s stock should have declined over 34% during the Great Recession if one paid attention to earnings and dividends instead of fretting over how far shares might fall.

There’s no denying Johnson & Johnson is a high quality dividend growth stock. The company has compounded earnings-per-share and dividends at 5.6% and 8.9% a year, respectively, over the last decade. Investors in Johnson & Johnson should expect slow and reliable growth of around 6% a year combined with the company’s current 3.3% dividend yield for total returns of around 9% a year.

Johnson & Johnson is currently trading at a price-to-earnings multiple of 16 – this is below the S&P 500’s current price-to-earnings ratio of 18.8. Johnson & Johnson appears somewhat undervalued at this time relative to the S&P 500.

#7 – Coca-Cola

The Coca-Cola brand is well-known around the world. In total, Coca-Cola has 20 brands that generate over $1 billion a year in sales. Many of these are non-carbonated, including Dasani, Simply juice, Fuze Tea, Minute Maid, Vitamin Water, and Gold Peak tea.

Coca-Cola is nothing if not consistent. The company delivered earnings-per-share growth of 7.2% a year over the last decade. Dividends grew at 9.0% a year over the same time period. Coca-Cola’s management expects long-term growth of between 7% and 9% a year. On top of this growth, Coca-Cola stock has a 3.5% dividend yield. This gives investors expected total returns of between 10% and 12% a year for Coca-Cola.

Coca-Cola is a Dividend King. This means the company has paid dividends for 50 or more consecutive years. Being a Dividend King means a company qualifies to be a Dividend Aristocrat – twice. Click here to see all 16 Dividend Kings analyzed.

As one would expect from a company that sells low priced non-alcoholic beverages, Coca-Cola remained highly profitable throughout the Great Recession of 2007 to 2009. The company’s earnings-per-share over this time period are shown below:

Earnings-per-share did decline 2.6% from 2008 to 2009; this is a very small decrease compared to large earnings declines suffered by the overall market. Coca-Cola has proven over the last 50 years that it will pay rising dividends year-in-and-year-out, regardless of the overall economy.

Coca-Cola is currently trading for a price-to-earnings ratio of 17.3 (using adjusted earnings). The company appears somewhat undervalued given its above average expected total returns and sleep-easy-at-night level of safety.

#6 – Consolidated Edison

Consolidated Edison (ED) is viewed as a safety stock – and for good reason. The company generated extremely stable cash flows from its heavily regulated gas and electric utilities businesses in New York, New Jersey, and Pennsylvania. Consolidated Edison provides gas utility services for over 3 million customers, and electric utility services for over 1 million customers.

The company’s earnings-per-share and dividends-per-share through the Great Recession of 2007 to 2009 are shown below:

Earnings recovered to $3.47 a share the following year. Throughout the Great Recession, Consolidated Edison’s dividend payments were never in any doubt. At its worst, the company had a 75% payout ratio. Earnings-per-share fell just 9.8% through the worst of the Great Recession.

Consolidated Edison currently has earnings-per-share of $3.77 a share and pays dividends of $2.60 a share. This gives the company a payout ratio of 69%. If earnings-per-share were to decline 10% (about as much as they did during the Great Recession), the company would still have a payout ratio of 76.6%.

Investors looking for steady, consistent dividends should look no further than Consolidated Edison. It is highly unlikely that the company reduces its dividend payments – even if we enter into a full global recession.

Relevant stats for Consolidated Edison are shown below:

#5 – Becton, Dickinson (BDX)

Becton, Dickinson (BDX) is a medical instruments and supplies corporation with a market cap of $28.9 billion. The company was founded in 1897 and has paid increasing dividends for 43 consecutive years.

BDX has compounded earnings-per-share at 9.0% a year over the last decade. Dividends have grown even faster, at 13.1% a year. The company currently has a payout ratio of around 35%… It is likely management will continue to increase dividends at a faster pace than overall earnings over the next several years.

The Great Recession caused many businesses (AIG, Bear Stearns, Bank of America, General Motors) to lose billions. BDX grew earnings-per-share each year through the Great Recession:

People do not put off medical procedures or hospital visits because the economy is bad. This creates demand for BDX’s medical instruments and supplies regardless of the overall economy. The health care sector in general is one of the most recession resistant – along with low-priced consumer goods. These are items people simply do not (or cannot) cut back on.

BDX is currently trading for a price-to-earnings ratio of around 20. This is a bit over the S&P 500’s current price-to-earnings ratio, but reflects the solid growth prospects and safety of BDX. The company appears to be trading around fair value at current prices.

#4 – W.W. Grainger

W.W. Grainger (GWW) Is the largest MRO (Maintenance, Repair, Operations) supply company in North America. W.W. Grainger was founded in 1927 and has paid increasing dividends for 43 consecutive years.

The company performed well over the Great Recession of 2007 to 2009. Earnings-per-share declined from a high of $6.09 in 2008 to a low of $5.25 in 2009; a decline of 13.8%. Compare this relatively modest decline to the S&P 500’s earnings-per-share decline of 41.6% from a high of $96.40 in 2006 to $56.33 in 2009.

W.W. Grainger performed well through the Great Recession because it provides businesses with fairly small purchases that are necessary to keep operations going. W.W. Grainger’s large size (relative to other MRO companies) and excellent distribution network give it a competitive advantage – and allow it to sell its products at reasonable prices.

The past decade has been rewarding for W.W. Grainger shareholders. The company has compounded earnings-per-share at 14.3% a year, and dividends at 20.3% a year over the last decade. The company currently has a payout ratio of just 37.1% – management still has ample room to grow dividend payments faster than earnings-per-share over the next several years.

Rapid growth is expected to continue for W.W. Grainger. The company’s management is targeting revenue growth of between 7% to 12% a year over the several years. The company is also planning to repurchase $3 billion worth of shares over the next 3 years. This comes to a share count reduction of about 6% a year. In addition, the company has a 2.2% dividend yield for expected total returns of 15% to 20% a year from:

W.W. Grainger is currently trading for a price-to-earnings ratio of 18.1. The company appears significantly undervalued given its high marks for safety and excellent total return potential.

#3 – Abbott Laboratories

Abbott Laboratories (ABT) manufactures and sells nutrition products, medical devices and diagnostic equipment, and pharmaceuticals. Abbott Laboratories is the #1 adult nutrition company in the world, and the #1 pediatric nutrition company in the United States thanks to its Similac, Pedialyte, and Ensure brands.

Abbott Laboratories is a global business; it generates about 30% of sales in the United States and 70% internationally. The company operates in 4 segments:

In 2012 Abbott Laboratories spun-off its biopharmaceutical business AbbVie (ABBV), so an apples-to-apples comparison of results over the Great Recession versus today is not possible.

With that said, Abbott Laboratories did grow its earnings-per-share each year through the Great Recession. Abbott Laboratories benefits from the same recession-resistance afforded by the health care industry that BDX does (discussed above).

Abbott Laboratories continues to grow rapidly. The company expects constant-currency earnings-per-share growth of 13% to 18% in fiscal 2015. Abbott Laboratories has positioned itself to take advantage of emerging market growth – all of its generic pharmaceutical segment revenue is now generated in developing and emerging markets.

Significant exposure to emerging markets may slow Abbott Laboratories’ growth more than developed-market-centered health care businesses if we do enter into another global recession. Still, the company has proven it can withstand the effects of recessions and pay shareholders increasing dividends year-after-year.

#2 – Wal-Mart

I recently wrote about how Wal-Mart (WMT) is an ideal stock to own for the next recession. Wal-Mart is known to offer ‘every day low prices’. When times get tough, consumers look to buy their household goods for cheap.

Wal-Mart benefits from this trend, and therefore from recessions. Take a look at the company’s earnings-per-share over the Great Recession of 2007 to 2009:

Earnings-per-share increased 8.2% from 2007 to 2008, and 7.0% from 2008 to 2009. This solid growth came when many businesses were experiencing large losses.

Now is a unique time in Wal-Mart’s history. The company is trading at its highest dividend yield of the last decade. Now is the perfect time to enter into a position in Wal-Mart. The company’s stock currently has a 3.1% dividend yield.

Wal-Mart has managed to grow earnings-per-share at 7.6% a year over the last decade, while dividends have grown at a faster 13.8% a year. Wal-Mart currently has a payout ratio of just 30.2%. Despite its low payout ratio, the company will likely grow its dividend payments in line with earnings growth over the next few years as Wal-Mart is investing heavily for growth.

Wal-Mart is focusing on increasing its e-commerce capabilities and better incentivizing its employees through higher wages. Short-term results are mixed. On one hand, comparable store sales are increasing, but profits were down in the company’s latest quarter due to higher-than-expected employee costs, greater shrink (basically inventory theft), and lower pharmaceutical reimbursements.

Despite recent mediocre results, Wal-Mart’s long-term growth prospects remain favorable. Smaller layout Neighborhood Market stores are growing rapidly, as is e-commerce revenue. Additionally, comparable store sales are up in the United States. If we do enter into another recession, Wal-Mart will likely benefit from increased store traffic and greater sales – and earnings.

#1 – McDonald’s

McDonald’s (MCD) golden arches are recognized around the world. The company is well-known for cheap food served quickly.

McDonald’s benefits from recessions in the same way that Wal-Mart does; it is known to be very cheap. When people try to conserve money, they switch to lower priced restaurants – it doesn’t get much lower priced than McDonald’s. The company’s reputation for cheapness is what drives solid results during recessions.

The Great Recession of 2007 to 2009 was beneficial for McDonald’s. The company’s stock gained 55.6% from 2007 to 2009 – that’s an outperformance of over 70 percentage points versus the S&P 500 over the same time period. McDonald’s earnings-per-share over the Great Recession are shown below:

From 2007 to 2008, McDonald’s grew its earnings-per-share by 26.1%. The next year (from 2008 to 2009), it grew earnings-per-share by 8.4%. McDonald’s grew rapidly during the last large recession.

With that said, the company has struggled in recent years. This has resulted in a CEO change and a streamlined focus on financial efficiency and operating speed and efficiency. McDonald’s is franchising more of its company-owned stores, and has plans to simplify its menu.

The company is well-positioned to take advantage of changing consumer preferences during recessions. McDonald’s has over 30,000 locations around the world – making it the largest restaurant chain in the world by a wide margin. The company’s tremendous scale means that when comparable store sales rise, McDonald’s will see a large influx of profits.

Fortunately for shareholders, McDonald’s is very shareholder friendly. The company has paid increasing dividends for 39 consecutive years. The company currently has a payout ratio of about 70% (using adjusted earnings) and a dividend yield of 3.7%. McDonald’s also regularly engages in share repurchases, resulting in further cash returns to shareholders.

McDonald’s currently has an adjusted price-to-earnings ratio of 18.8. The company appears to be either fairly valued or slightly undervalued given its high marks for safety and shareholder friendly management.

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