NEW YORK (TheStreet) -- The following five dividend stocks grew sales, GAAP earnings per share, and free cash flow during the 2008/2009 financial crisis, allowing them to raise their dividends and outperform the S&P 500 by more than 25% in 2008.
With global economies facing increased uncertainty and stock markets showing higher volatility in recent weeks, maintaining a dividend portfolio that provides safe income and capital preservation in down markets is more important than ever.
So, here are five dividend stocks that breezed through the financial recession. One of them has even increased its dividends for more than 25 consecutive years, making it one of the 52 dividend aristocrats.
Whether China's economy slows down or developed markets begin to roll over, these five dividend stocks have demonstrated durability throughout the toughest of times.
1. Bristol-Myers Squibb (BMY - Get Report)
After splitting off its nutritional products business in late 2009 and divesting additional non-core assets over the past few years, Bristol-Myers Squibb is now a pure biopharmaceuticals company with half of its sales generated outside of the United States. As a major drug maker selling a range of branded prescription drugs, Bristol-Myers Squibb relies on developing new products to replace sales generated from drugs that come off of patent protection and are challenged by generic drugs.
Fortunately, demand for many drugs is fairly insensitive to the health of the global economy. Bristol-Myers Squibb grew sales by 13% in 2008 and 6% in 2009, while its stock returned -6% compared to the S&P 500's 39% plunge in 2008. The company's strong performance was helped by rising sales of Plavix, an inhibitor for the prevention of strokes and heart attacks and Bristol-Myers Squibb's largest product at the time.
The company's seven largest drugs generated 68% of its revenue in 2014, with its largest product totaling 13% of sales and losing commercialization rights in the United States in April 2015. Having a diversified portfolio of protected drugs provides business stability because there are fewer large revenue holes to fill as patents expire.
While sales are expected to fall around 5% in 2015, including foreign currency headwinds, the future looks bright for Bristol-Myers Squibb. The company has about 50 drugs in development covering a wide range of medical conditions, including a class of anticancer drugs that are part of a new pack of oncology treatments that could generate more than $30 billion in sales at its peak.
The stock's current dividend yield is 2.4%, but the dividend's annual growth rate has been just 2%-to-3% over the past few years. Bristol-Myers Squibb's payout ratio using the 2015 consensus earnings estimate is approximately 80%, suggesting dividend growth will remain limited in the near-term. However, analysts see potential for Bristol-Myers Squibb's earnings per share to grow from around $1.80 this year to $3 over the next few years as its research and development pipeline is commercialized, providing opportunity for faster dividend growth. Expectations for solid multi-year earnings growth have the stock trading at a forward price-to-earnings ratio of 34, a significant premium compared to the market.
Church & Dwight has been in business since 1846, a claim few companies can make and a sign of durability. The company sells a variety of household and personal care products, including well-known brand names such as Arm & Hammer, Trojan, Oxiclean, Vitafusion, and more.
During the Great Recession, Church & Dwight's results were nothing short of phenomenal. Sales grew 9% and 4% in fiscal year 2008 and 2009, respectively. Earnings and free cash flow grew by double-digits each year, and the stock's total return was a positive 4% in 2008, outperforming the market by about 40%. Of the thousands of dividend stocks we monitor, Church & Dwightoutperformed more than 90% of them in 2008. Talk about downside protection.
The company's dividend yield sits at 1.6% today, but the dividend payment compounded at an annualized rate of 40% from 2010 to 2014. Church & Dwight is one of more than 340 dividend-paying stocks to increase its dividend for at least 10 consecutive years (you can see the full list here). With a payout ratio less than 50% and earnings expected to keep growing 5%-to-10% per year going forward, future dividend growth should remain healthy. Church & Dwight trades at a forward price-to-earnings ratio of 26, but its underlying business fundamentals should remain strong in just about any market environment.
Comcast is the biggest cable TV operator in the United States, with more than 20 million subscribers. After the financial crisis, Comcast acquired NBCUniversal to enter the media business with its own cable networks, broadcast TV, filmed entertainment, and theme parks. However, cable distribution still accounts for the majority of Comcast's cash flow.
The cable business is notoriously sticky, with inflexible contracts, persistent price hikes, and very few competitors in most markets due to the cost of building out a reliable network. Comcast's sales grew a minimum of 4% every year during the Great Recession, and GAAP diluted earnings per share increased from $0.83 in fiscal year 2007 to $1.29 in fiscal year 2010. As a result, the stock returned -7% in 2008, easily beating the market.
Comcast's current dividend yield is just 1.7%, but its growth prospects look very good thanks to the company's sub-30% payout ratio. Management hiked the dividend by 11% in February 2015, continuing its streak of double-digit increases in each of the past five years. Since 2011, Comcast's quarterly dividend payment has increased more than 170%. The stock trades at a forward price-to-earnings ratio of 17.5 and could be attractive for long-term dividend growth investors.
Do you know what things really don't care about the health of China's economy, the price of oil, or turmoil in Greece? Bugs. Rollins owns the well-recognized Orkin brand, which provides pest and termite control services to residential and commercial customers primarily located in the United States.
While the rest of the world was in a panic during 2008 and 2009, bugs continued to pester people and drum up business for Rollins. Almost like clockwork, Rollins's sales have increased between 4% and 7% every year over the last decade aside from fiscal year 2008 when they jumped 14% on an acquisition (2008 sales grew 3% excluding the acquisition). The stock returned -4% in 2008, significantly outpacing the market.
The company's heavy investments in advertising, coupled with the emotional pain its customers face when dealing with unsightly pests, allow Rollins to push through regular price increases in the annual contracts it maintains with households and businesses alike.
Altogether, this has allowed Rollins to consistently grow its GAAP diluted earnings per share:
Source: Simply Safe Dividends
The company also has no debt and sits on $110 million in cash, allowing it to continue returning capital to shareholders and acquiring smaller pest control businesses. Unfortunately, Rollins's durability comes at a price with the stock trading at more than 30x forward earnings and yielding just 1.1%. However, the dividend should continue to see double-digit growth rates like it has in the past because Rollins's payout ratio is less than 50% and earnings seem likely to continue growing. On a pullback, perhaps driven by unfavorable weather conditions, Rollins is a stock to remember.
To reach Wal-Mart's annual revenue base (over $480 billion in fiscal year 2015), you would need to sell more than $60 worth of merchandise to every single person in the world. Wal-Mart is beyond huge, allowing it to squeeze suppliers, gain economies of scale, and maintain its position as the everyday low-price leader in the brick-and-mortar retail market.
When times get tough, low prices are especially appealing to consumers. Wal-Mart also generates over half of its sales from grocery items, which are needed by consumers regardless of how the economy is doing. As a result, Wal-Mart's sales grew by 7% in fiscal year 2009 (year ended 1/31/09) and 1% in fiscal year 2010. Meanwhile, Wal-Mart's GAAP diluted earnings per share grew no less than 8% per year in 2008 and 2009. Wal-Mart's stock outperformed more than 95% of all other dividend stocks in 2008, returning a whopping 20% as the market tanked more than 30%.
Wal-Mart is facing several challenges today, including rising labor and healthcare costs, fewer new store expansion opportunities, and increased online competition. With profit growth slowing, Wal-Mart's stock has underperformed in recent years and now yields 3.1%. Dividend growth has also decelerated from a 13% compound annualized growth rate over the last decade to just 2% raises in each of the last two years. Even with earnings struggling to grow, Wal-Mart's payout ratio is less than 50%, allowing it to continue pushing through modest dividend increases.
The stock trades at a reasonable 14 times forward earnings, suggesting it might be one of the best positioned dividend stocks to outperform in the event of another recession and bear market.