- These six undervalued stocks with strong consumer brands are worth buying now, given their ability to do well in a recession.
- The Coca-Cola Company (KO): This $275 billion stock will have steady earnings and dividends during a recession.
- Verizon (VZ): Telecom stocks like this will still collect their monthly mobile phone service payments during a recession.
- McDonald’s (MCD): People still eat burgers and fries during a recession, and McDonald’s will do quite well as a result.
- Philip Morris International (PM): Cigarettes and vaping products will be just as strong during a recession.
- AT&T (T): AT&T is now free of its loss-making entertainment divisions and can focus on steady telecom revenue.
- CVS Health (CVS): This pharmacy/health insurer is cheap and will have steady earnings/dividends during a downturn.
Sticking with strong brand-name stocks during an economic downturn will give your portfolio the ability to withstand hurt edges from volatile stock actions. People will still buy Cokes, smoke cigarettes, go out for fast food and drive to the drug store, no matter how tough economic times get. As a result, these undervalued stocks have a natural buffer from hard times.
Moreover, sticking to the largest market capitalization stocks in these categories also provides some protection. I went through the top 100 market valuations and picked out the top six consumer brand stocks.
You can see the rankings of these six stocks in terms of their market capitalization in the chart on the right.
A major element of these stocks’ strength is their ability to pay dividends. Not only does this deter short-sellers, but the income provided by the company to shareholders provides a hedge against aggressive downward moves in the stock.
The next chart on the right shows the rankings of these stocks in terms of their dividend yields.
Lastly, as I have pointed out before, the fact that these companies are growing their dividends provides an extra buffer. For example, the average yield of this group of six stocks is about 3.95%. Their dividends are growing about 5% a year.
Compare this with a 4% coupon bond. If we invested $1,000 in this group of stocks versus $1,000 in the bond, the results can be seen in the final chart on the right.
It shows that by year two, the group of stocks will have paid out a larger cumulative amount of money than the bond investment. In fact, by year 10, it has paid out almost 25% more on a cumulative basis — $496 versus $400 to the bondholders. This shows that even in the short term, assuming a recession lasts less than two years, a group of solid dividend growing consumer stocks is better than a bond investment.
Let’s dive in and look at these undervalued consumer brand stocks.
|KO||The Coca-Cola Company||$63.53|
|PM||Philip Morris International||$99.34|
The Coca Cola Company (KO)
Market Cap: $275 billion
The Coca-Cola Company (NYSE:KO) just reported its first-quarter earnings, showing case volume was up 8% year-over-year (YOY) and net revenues were up 16% YOY. Moreover, its non-GAAP earnings per share (EPS) was up 16%.
The company’s free cash flow (FCF) was down from $1.42 billion to $406 million, a drop of more than $1 billion. That’s the bad news. The good news is the business is still producing huge amounts of free cash flow. For example, compare this with Amazon (NASDAQ:AMZN), which just reported a last 12-month (LTM) FCF outflow of more than $29 billion.
Coca-Cola pays a consistent and growing dividend, giving it a yield of 2.77%. Coca-Cola has had 59 years of consecutive dividend growth. In the last 10 years, its compound annual growth rate (CAGR) of dividends was 5.88%. That history is going to help the company power through a recession, and the stock will do well as a result.
Market Cap: $194 billion
Verizon (NYSE:VZ) reported solid earnings for Q1 — $1.35 per share after excluding special items compared to $1.36 in the year-earlier period. Moreover, it provided guidance for its 2022 adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization.) The metric will be in the lower end of the 2% to 3% growth range.
Even more importantly, Verizon produced FCF of $1 billion for the quarter, although this included $3.49 billion in negative changes in working capital. Excluding those changes, the company has more than enough to pay its $2.65 billion in quarterly dividends.
The point is that Verizon makes solid cash flow and pays out a solid dividend. According to Seeking Alpha, Verizon has paid 18 years of consecutively growing dividends. That includes at least two recession periods, one being quite severe. There is every reason to believe Verizon will be able to continue this if a recession occurs.
Market Cap: $182 billion
McDonald’s Corp (NYSE:MCD) released its Q1 results on April 28, showing comparable sales rose 11.8% and 11% including the effects of store closings in Russia and Ukraine. Its operating income rose 1% including these closings, but 14% without them.
However, more importantly, the company did not experience any major effect in terms of free cash flow (FCF). For example, its Q1 2022 FCF was $1.732 billion compared to $1.77 billion a year ago. This is taken from its 10-Q filing as of May 2. In other words, despite store closings, its cash flow was down only $41 million. This might not reflect the ongoing costs, as the company said it expects to see $50 million per month in negative effects from the closings.
Nevertheless, McDonald’s pays a very steady dividend that costs just $1.025 billion each quarter, well less than its $1.7 billion in FCF. As such, the company can expect that its dividend will be secure, even during a recession.
In fact, McDonald’s has grown its dividend in each of the past 13 years, according to Seeking Alpha. Investors can expect it will be able to keep growing its dividend over the next year. That will provide a huge buffer for the stock should a severe recession hit. Given its present 2.24% dividend yield, MCD stock will likely be a very solid buy for most investors.
Philip Morris International (PM)
Market Cap: $152.8 billion
Philip Morris (NYSE:PM) released its Q1 results recently, showing it produced almost $889 million in FCF last quarter. That is substantially more than the $256 million in FCF it produced in last year’s Q1. Moreover, during the LTM period ending March 31, it generated $11.85 billion in FCF. This is more than enough to cover the $7.8 billion in dividends it paid out.
This is based on its ample $5 dividend, which is well below the $5.55 forecast EPS for this year and $6.15 in 2023. In effect, Philip Morris is a cash cow mainly because its customers are still buying cigarettes.
Its $5 annual dividend is not going to fall during a recession. It provides investors a 5.07% annual yield at its price as of May 2. Moreover, Philip Morris has raised the dividend in each of the past 13 years, according to Seeking Alpha. That should be a good reason to stick with this undervalued brand name stock during a recession.
Market Cap: $136.9 billion
AT&T cut its dividend to $1.11. At today’s price, that gives it a 5.8% dividend yield. This is secure, since AT&T says this will be about 40% or so of its FCF. Moreover, as a result of the WBD transaction, AT&T received $43 billion, which it’s using to pay down debt.
This also makes the dividend very secure on an ongoing basis for investors. As a result, the dividend payout ratio looks very comfortable.
For example, for 2023, 21 analysts surveyed by Refinitv forecast its earnings per share at $2.59. That means the $1.11 dividend per share is only 42.9% of forecast EPS. This brand-name stock looks like one of the best investments to weather a recession.
CVS Health (CVS)
Market Cap: $126.7 billion
Even during a recession, people are going to go to drug stores and get health insurance. This is good for CVS Health (NYSE:CVS), which owns both the CVS pharmacy chain as well as Aetna Insurance. It has more than 9,900 retail and 1,200 MinuteClinic locations.
The company has continuously paid a dividend for the past 25 years. This augurs well for its willingness to keep paying a dividend if a recession were to occur over the next year.
Moreover, its $2.20 annual dividend provides a generous 2.28% yield to investors. Given its ongoing positive free cash flow, CVS Health could keep raising its dividend. That will make it one of the best of the undervalued stocks to own during a recession.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.