The Ten Most Recession-Proof Dividend Aristocrats by Sure Dividend

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

  • 2007 through 2009 total return of 3.8% (versus -15.9% for the S&P 500)
  • 2007 through 2009 maximum drawdown of 29.4% (versus 55.2% for the S&P 500)

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:

  • 2007 earnings-per-share of $3.23
  • 2008 earnings-per-share of $3.24
  • 2009 earnings-per-share of $3.81

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

  • 2007 through 2009 total return of 6.6% (versus -15.9% for the S&P 500)
  • 2007 through 2009 maximum drawdown of 35.8% (versus 55.2% for the S&P 500)

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:

  • 2007 earnings-per-share of $1.83
  • 2008 earnings-per-share of $2.20
  • 2009 earnings-per-share of $2.39

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

  • 2007 through 2009 total return of 5.8% (versus -15.9% for the S&P 500)
  • 2007 through 2009 maximum drawdown of 34.4% (versus 55.2% for the S&P 500)

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:

  • 2007 earnings-per-share of $4.15
  • 2008 earnings-per-share of $4.57
  • 2009 earnings-per-share of $4.63

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

  • 2007 through 2009 total return of 28.1% (versus -15.9% for the S&P 500)
  • 2007 through 2009 maximum drawdown of 40.6% (versus 55.2% for the S&P 500)

The Coca-Cola brand is well-known around the world. In total, Coca-Cola has 20 brands that generate over $1 billion

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