3 Dividend Kings For An Uncertain Economy

This is a guest contribution by Bob Ciura of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth portfolios for the long run.

As investors look forward to distribution of coronavirus vaccines, the stock market has reflected this rising optimism with an impressive rally over the past several months. But the U.S. economy as a whole still faces a great deal of uncertainty in the coming months. For investors skittish about buying stocks at such high levels in the midst of a highly uncertain climate, we recommend considering high-quality dividend stocks.

Specifically, we favor stocks with long histories of increasing their dividend payouts, such as the Dividend Kings which have raised dividends for 50+ consecutive years. These stocks have demonstrated resilient business models that can survive even a deep and prolonged recession.

Sysco Corporation (SYY), Genuine Parts Company (GPC), and Colgate-Palmolive (CL) are three quality Dividend Kings that will continue to pay dividends each year, even in a severe economic downturn.

Dividend King #1: Sysco Corporation (SYY)

Sysco Corporation is the largest wholesale food distributor in the United States, and is expanding internationally. The company was founded in Houston, Texas in 1969 and now serves 600,000 locations with food delivery, including restaurants, hospitals, schools, hotels, and other facilities. According to estimates, the company has a 16% market share of total food delivery within the United States.

The company has been hit especially hard by the pandemic, as restaurants and other public venues have seen customer traffic decline significantly this year. In the 2020 third quarter, sales decreased by 23.0% to $11.8 billion, while adjusted earnings-per-share decreased from $0.64 to $0.34. However, we view the future much more positively, particularly if and when the coronavirus vaccine is distributed. Once the pandemic ends, consumers are likely to return to restaurants and other establishments.

In the meantime, investors can look forward to Sysco’s steady dividends and dividend growth. The company can maintain its dividend because even though business conditions are highly challenged right now, it has remained profitable.

Sysco has grown earnings by 15.7% annually over the past 5 years, and 6.6% over the past 9 years. The company grows organically, through tuck-in acquisitions, and more recently with share buybacks. The company is also in the process of cutting overhead costs, which should mildly boost bottom-line growth.

Sysco has an economic moat due to its large scale and entrenched distribution infrastructure, which gives it a cost advantage over most competitors. This moat is evidenced by the fact that the company generates double-digit returns on invested capital every year, which is much higher than its weighted average cost of capital.

Thanks to this stability, Sysco has raised its dividend every year since it went public and we expect it to continue to grow in the years to come. Shares currently yield 2.5%.

Dividend King #2: Genuine Parts (GPC)

Genuine Parts Company was founded in 1928 and since that time, it has grown into a sprawling conglomerate that sells automotive and industrial parts, electrical materials and general business products. Its core business is the NAPA auto parts brand. global span reaches throughout North America, Australia, New Zealand and Europe and is comprised of more than 3,100 locations. It generates approximately $17 billion in annual revenue.

Genuine Parts has a long history of generating steady growth. For example, from 2009 through 2019 the company grew revenue and adjusted earnings per share by 6.8% and 8.6%, respectively. This steady growth has allowed the company to increase its dividend for 64 consecutive years, giving it one of the longest dividend growth streaks in the entire stock market.

We believe the company has a long runway of growth up ahead, as it will benefit from changing automotive trends, specifically the fact that people are keeping their cars on the road longer. This is a major long-term catalyst for Genuine Parts, as older cars require more frequent repairs, and these repairs get more expensive as a vehicle gets older.

According to Genuine Parts, the average repair cost per year of a vehicle aged 1-5 years is $555. But this increases to $829 for a vehicle aged 6-12 years, and declines somewhat to an average annual repair cost of $797 for vehicles older than 12 years. As a result, the prime years for aftermarket repairs start at year 6. Fortunately for Genuine Parts, vehicles aged 6 years or older now represent over 70% of the total U.S. vehicle fleet.

This presents a very favorable backdrop for Genuine Parts’ core auto parts business, and the company has a long and proven track record of successfully taking advantage of growth opportunities. Genuine Parts states that its sales and profit have increased in 87 and 75 out of its 92-year history, respectively. Furthermore, it has generated record sales in 8 of the past 10 years, and record earnings per share in nine of the past 10 years.

Dividend King #3: Colgate-Palmolive (CL)

Colgate-Palmolive was founded all the way back in 1806. Today, it is a consumer staples giant that sells its products in over 200 countries around the world. It operates in four core categories: Oral Care, Personal Care, Home Care, and Pet Nutrition. The company’s most recognizable brands include Colgate, Palmolive, Softsoap, Ajax, and Hill’s among others.

Colgate-Palmolive dominates the toothpaste market, with the #1 global position. Colgate holds a 40% share in the global toothpaste market. Such an iron-clad grip on its core market has allowed Colgate-Palmolive to reward shareholders with steady dividends for over a century. The company has paid uninterrupted dividends since 1895. It has increased its dividend for 58 consecutive years.

Colgate-Palmolive’s strong brand portfolio is a major competitive advantage, and adds safety to the dividend, particularly in a recession. The company sells products like toothpaste, soap, and pet food, which consumers still need even when the economy enters a downturn.

The company has continued to register steady growth in 2020, as consumers stockpiled their pantries with staples products during the pandemic. Third-quarter results for both the top and bottom lines came in ahead of expectations. Total revenue was up 5.5% year-over-year to $4.2 billion, but on an organic basis, revenue rose 7.5%, easily beating estimates for a 3.9% gain.

Particular strength was seen in Latin America, Africa/Eurasia, as well as Pet Nutrition, all of which posted double-digit organic growth gains. The company continues to be a primary beneficiary of the pandemic and the consumer behavior shifts that have accompanied it. Earnings-per-share came to $0.79 on an adjusted basis, up 11% year-over-year. The company guided for net and organic sales to be up mid-single digits, while also expecting gross margin expansion, increased advertising spending, and 6% to 7% earnings-per-share growth.

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