6 undervalued consumer brand stocks to buy before a recession
- These six undervalued stocks with strong mainstream brands are worth buying now, given their ability to perform well in a recession.
- The Coca-Cola Company (KO): This $275 billion stock will generate stable earnings and dividends during a recession.
- Verizon (VZ): Telecom stocks like this will continue to collect their monthly cellphone service payments during a recession.
- McDonald’s (MCD): People still eat burgers and fries during a recession, and McDonald’s will do pretty well.
- Philip Morris International (PM): Cigarettes and vaping products will be just as strong in a recession.
- AT&T (J): AT&T is now freed from its loss-making entertainment divisions and can focus on stable telecommunications revenues.
- SVC Health (SVC): This pharmacy/health insurance is cheap and will have steady income/dividends in a downturn.
Sticking to strong branded stocks during an economic downturn will give your portfolio the ability to withstand the negative effects of volatile stocks on equities. People will still be buying cokes, smoking cigarettes, going out for fast food and driving to the pharmacy, no matter how tough the economy is. As a result, these undervalued stocks have a natural buffer against tough times.
Additionally, sticking to the largest market cap stocks in these categories also offers some protection. I reviewed the top 100 market valuations and selected the top six mainstream brand stocks.
You can see how these six stocks rank by market capitalization in the chart to the right.
A major element of the strength of these stocks 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 declines in the stock.
The next chart to the right shows how these stocks rank in terms of dividend yield.
Finally, as I have already pointed out, the fact that these companies are increasing their dividends provides an additional buffer. For example, the average return for this group of six stocks is approximately 3.95%. Their dividends increase by about 5% per year.
Compare that with a 4% coupon bond. If we invested $1,000 in this stock group versus $1,000 in the bond, the results can be seen in the final chart to the right.
It shows that by the second year, the stock group will have paid out a larger cumulative amount of money than the bond investment. In fact, by year 10, he paid almost 25% more on a cumulative basis — $496 compared to $400 to bondholders. This shows that even in the short term, assuming a recession lasts less than two years, a group of consumer stocks with strong dividends and high growth is better than a bond investment.
Let’s dive in and examine 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 released its first quarter results, showing case volume increased 8% year-over-year (YOY) and net revenue increased 16% year-over-year. Additionally, its non-GAAP earnings per share (EPS) increased 16%.
The company’s free cash flow (FCF) fell from $1.42 billion to $406 million, a drop of more than $1 billion. That’s the bad news. The good news is that the company 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 constant and growing dividend, giving it a yield of 2.77%. Coca-Cola has had 59 consecutive years of dividend growth. Over the past 10 years, its dividend compound annual growth rate (CAGR) was 5.88%. This story will help the company through a recession, and the stock will do well as a result.
Market cap: $194 billion
Verizon (NYSE:VZ) reported strong first-quarter earnings — $1.35 per share after excluding special items, compared to $1.36 a year earlier. Additionally, it provided guidance for its 2022 Adjusted EBITDA (earnings before interest, tax, depreciation and amortization). The metric will be on the lower end of the 2% to 3% growth range.
More significantly, Verizon produced FCF of $1 billion for the quarter, although that included $3.49 billion in negative working capital changes. Excluding those changes, the company has more than enough to pay its $2.65 billion in quarterly dividends.
The thing is, Verizon is generating strong cash flow and paying a strong dividend. According to Looking for Alpha, Verizon has paid 18 years of consecutive growing dividends. This includes at least two periods of recession, one of which was quite severe. There is every reason to believe that Verizon will be able to continue like this in the event of a recession.
Market cap: $182 billion
McDonald’s Corporation (NYSE:MCD) released its first-quarter results on April 28, showing comparable sales rose 11.8% and 11%, including the effects of store closures in Russia and Ukraine. Its operating income increased by 1% including these closures, but by 14% without them.
However, more importantly, the company did not experience a 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 from his May 2 10-Q filing. In other words, despite the store closings, its cash flow was only down $41 million. That might not reflect ongoing costs, as the company said it expects to see $50 million a month in negative effects from the shutdowns.
Nevertheless, McDonald’s pays a very stable dividend that costs only $1.025 billion each quarter, far less than its $1.7 billion in FCF. Thus, the company can expect its dividend to be safe even in times of recession.
In fact, McDonald’s has increased its dividend in each of the past 13 years, according to Looking for Alpha. Investors can expect it to be able to continue to increase its dividend over the next year. This will provide a huge buffer for the stock in the event of a severe recession. Given its current dividend yield of 2.24%, MCD stock is likely to be a very solid buy for most investors.
Philip Morris International (PM)
Market cap: $152.8 billion
Philip Morris (NYSE:PM) recently released its first quarter results, showing that it produced nearly $889 million in FCF last quarter. That’s significantly more than the $256 million in FCF it produced in the first quarter of last year. Additionally, during the LTM period ending March 31, it generated $11.85 billion in FCF. That’s more than enough to cover the $7.8 billion in dividends paid.
This is based on its ample $5 dividend, which is well below projected EPS of $5.55 for this year and $6.15 in 2023. Indeed, Philip Morris is a cash cow primarily because his customers still buy cigarettes.
Its $5 annual dividend will not drop in a recession. It offers investors an annual return of 5.07% at its May 2 price. Additionally, Philip Morris has increased the dividend in each of the past 13 years, according to Looking for Alpha. That should be a good reason to stick with this undervalued branded stock during a recession.
Market cap: $136.9 billion
AT&T (NYSE:J) recently spun off its WarnerMedia division and merged it with Discovery Inc. The new company is called Discovery of Warner Bros. (NASDAQ:WBD).
AT&T cut its dividend to $1.11. At today’s prices, that gives it a dividend yield of 5.8%. It sure is, since AT&T says it will be around 40% or more of its FCF. Additionally, as a result of the WBD transaction, AT&T received $43 billion, which it is using to pay down its debt.
It also makes the dividend very safe on an ongoing basis for investors. As a result, the dividend payout ratio looks very comfortable.
For example, for 2023, 21 analysts polled by Refinitv forecast its earnings per share at $2.59. This means that the dividend of $1.11 per share is only 42.9% of expected EPS. This trademark stock looks like one of the best investments for weathering a recession.
CVS Health (CVS)
Market cap: $126.7 billion
Even during a recession, people will go to pharmacies and get health insurance. It’s good for SVC Health (NYSE:SVC), which owns both the CVS drugstore chain and Aetna Insurance. It has over 9,900 retail outlets and 1,200 MinuteClinic locations.
The company has continuously paid a dividend for the past 25 years. This bodes well for its willingness to continue paying a dividend should a recession occur over the next year.
In addition, its annual dividend of $2.20 offers a generous return of 2.28% to investors. Given its continued positive free cash flow, CVS Health may continue to increase its dividend. This will make it one of the best undervalued stocks to hold during a recession.
As of the date of publication, Mark R. Hake held no position (directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com publishing guidelines.