These are undoubtedly uncertain times, with businesses grinding to a halt. No one knows how long these troubled times will last, with various governments trying to control the spread of the coronavirus illness, resulting in people staying home and millions of workers getting laid off. It is equally unclear how quickly these businesses will bounce back once the stay-at-home orders are lifted.
However, during economic slowdowns, reliable dividend payers help stabilize returns. While you are waiting for things to improve, investors can turn to these companies to provide them with an income stream. Even better, the companies, Walmart (NYSE:WMT), Colgate-Palmolive Co. (NYSE:CL), and Kimberly Clark (NYSE:KMB) are consumer staples, which means these companies sell everyday items that people tend to buy no matter what is happening.
In other words, you shouldn't have to worry about these companies cutting dividends as several others have done.
A huge retailer
Walmart's extensive retail network offers “everyday low prices” to its customers. Management's well-known strategy is to keep a tight lid on expenses and pass on these savings to its customers. In fact, Walmart seeks to offer the lowest prices, and it serves 265 million customers weekly.
The company has done well during the coronavirus pandemic, increasing traffic and sales. True, Walmart is limiting the number of people who can go into the store at one time, but it is considered essential and will remain open. The demand for some items may fade after the illness passes, but things will even out over time and customers are going to keep buying from Walmart. Management has also built up some goodwill with employees by paying them special bonuses, helping keep up morale and retention.
For fiscal 2020 (ended Jan. 31, 2020), the retail giant's sales were $524 billion and operating income was $20.6 billion. On its cash flow statement, Walmart generated $25.3 billion of operating cash flow. After deducting $10.7 billion of capital expenditures from this operating cash flow, its free cash flow easily covered the $6 billion in dividends.
Walmart has a history of raising the quarterly payout by a penny each year. Its $0.54 dividend was paid in March, equating to a 1.7% yield.
With a payout ratio of 41%, Walmart should easily be able to afford its ongoing dividend payments, and I don't see any danger of the company cutting it. In fact, Walmart has increased its dividend each year since 1974.
Surviving over 200 years
Founded in the early 1800s, Colgate-Palmolive makes an array of well-known brands, including several toothpaste and toothbrushes under the Colgate name, liquid hand soaps that are sold under popular brand names like Softsoap and Palmolive, plus household products like Palmolive and Ajax dishwashing liquids.
Oral care represented 46% of Colgate's 2019 sales, and people aren't going to stop buying toothpaste, no matter the state of the economy. Its Personal Care and Home Care products were a combined 36%, and these products (such as hand soap, dishwashing liquids, and household cleaners) are also going to hold up. There has been a run on these types of products as people try to disinfect so they don't catch the coronavirus. While demand may soften since consumers will have a stash of products, it won't fall off a cliff even in a recession.
Last year, Colgate's sales growth has been tepid, rising 1% year over year, from 2018's $15.5 billion to $15.7 billion last year, based on GAAP reporting, weighed down by foreign exchange translations. Comparing apples-to-apples, organic sales growth was a more respectable 4%.
The company generates plenty of free cash flow to support its dividends, to the tune of $2.8 billion last year after $335 million in capital expenditures. This handily covers the $1.6 billion in dividends.
The payout ratio is 62%, which is a bit high but not worrisome for a company that has a steady revenue stream. However, Colgate is committed to boosting dividends annually, having done so for nearly 60 years. This includes recently increasing the payment to $0.44. It has also paid a dividend to shareholders since 1895.
The 2.5% dividend yield may not sound too exciting, but add in the prospect for stable demand and increased dividends, and that sounds pretty good in this risky environment. After all, it is truly remarkable that the company has continued making payout for 125 consecutive years.
More stable brands
Kimberly Clark hasn't been around as long as Colgate-Palmolive, but it will celebrate its centennial anniversary in eight years, which is not too shabby.
It also has strong brands under its umbrella, with products grouped in three segments. Personal Care includes diapers, baby wipes, and feminine products sold under well-established brands like Huggies, Pull-Ups, Kotex, and Depend. Consumer Tissue includes bathroom tissue, paper towels, and napkins sold under the Kleenex and Scott brands, to name just a couple. People will still buy diapers and towels in good and bad times. There is the K-C Professional business that sells things like tissues, towels, soaps, and sanitizers to businesses, which will no doubt feel the effects of businesses shutting down. But the other two businesses, Personal Care and Consumer Tissue, are the main revenue and profit drivers, with these businesses accounting for 82% of its $18.5 billion in 2019 sales. Besides, there is no doubt in my mind that companies will start purchasing these necessities once offices reopen.
The cash flow coverage is tighter than the other two companies, with free cash flow of $1.5 billion and dividends of $1.4 billion. It has a 66% payout ratio. However, people still need its products and these will still move off the shelves. Kimberly Clark also has the highest dividend yield, 3.2%, compared to the others.
These three companies offer between a 1.7% and 3.2% dividend yield. Sure, there are others that offer higher yields, but those are riskier and the dividends are a lot less secure. I expect these three to continue doing well even in a down economic cycle, offering stability and peace of mind.
Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.