Exxon Mobil (XOM)
Sector: Energy Industry: Integrated Oil & Gas
Recession Return: S&P 500 lost 55% from 2007 – 2009; XOM shares lost 28%
Dividend Growth Streak: 35 years
Normally one wouldn’t think that companies in cyclical industries tied to volatile commodity prices would make for good stocks to own before a recession. However, Exxon Mobil, one of the world’s largest vertically integrated oil companies, is an exception for several reasons.
First, the company’s diversified business model helps smooth out earnings and cash flow during times when oil prices are low. Specifically, Exxon’s refining and petrochemical businesses benefit from low oil prices and thus become more profitable while its upstream production segment contracts.
More important than diversification is the company’s track record of conservative and disciplined capital allocation. Exxon has historically been the most profitable major oil giant, thanks to management’s superior ability to identify and invest in projects that generate some of the industry’s best returns on invested capital. That’s partially due to the firm’s relatively good record of avoiding project delays and cost overruns, as well as enjoying the lowest rate of asset write-downs of any of its major peers.
Especially important to its dividend safety, however, is how the company manages its debt. Exxon has the strongest balance sheet in the industry (AA+ credit rating) which allows it to borrow during industry downturns to keep investing in growth projects while maintaining its impressive dividend track record.
The company has paid dividends every year for more than a century. Since 1983 Exxon has been raising its payout each year, a 35-year stretch of time that included numerous recessions, oil crashes, and a 10-year period when oil prices were around $10 to $15 per barrel.
And thanks to its bold plan to boost its investment spending from $19 billion in 2016 (the peak of the oil crash) to $30 billion per year between 2020 and 2025, Exxon believes it can grow its operating cash flow by between 105% and 150% over the next seven years if oil prices average between $60 and $80 per barrel over that time. If successful, Exxon should have no trouble continuing its historical long-term 7% annual dividend growth rate long into the next decade.
What about Exxon’s volatility during bear markets? Well, oil companies are inherently more volatile than most defensive stocks, but as far as Exxon goes its historical volatility is actually quite good. In fact, during the financial crisis XOM shares only lost 28% when the S&P 500 fell 55%. Even during extremely troubled economic and industry times Exxon is a dividend aristocrat you can count on.
Governments trust that Exxon can get projects done faster than most state-owned oil giants given its technology and operational leadership, often while achieving better production yields by drilling in areas where others can’t. This provides the host country with more money faster, making Exxon an attractive partner.
Going forward, while most energy producers are pulling back on spending in response to weak oil and gas prices, Exxon sees a need to invest to meet long-term energy demand and offset the natural depletion that occurs at wells.
The company expects to spend about $30 billion annually between 2020 and 2025 to boost its upstream production by 25%, increase its chemical output by 30%, and potentially double its cash flow by 2025 compared to 2018.
These plans shouldn’t threaten the dividend, which management expects to consume about 60% of the firm’s free cash flow between 2019 and 2025. Even if the price of oil falls to $40 per barrel, Exxon’s cash flow is still expected to see a potential 50% bump.
Overall, Exxon is one of the best run and financially strongest integrated oil majors in the world. The firm’s capital discipline, quality assets, integrated operations, diverse resource base, and scale will continue to keep Exxon a global force in energy.
Johnson & Johnson (JNJ)
Sector: Healthcare Industry:Pharmaceuticals
Recession Return: S&P 500 lost 55% from 2007 – 2009; JNJ shares lost 27%
Dividend Growth Streak: 56 years
Johnson & Johnson is the largest global medical conglomerate with over 250 subsidiaries operating across more than 60 countries. The firm’s three business segments provide J&J with a very diversified mix of revenue, earnings and cash flow. However, the Pharmaceuticals division is the largest contributor, accounting for over half of total pretax profits.
Johnson & Johnson has managed to raise its dividend each year for more than half a century, demonstrating its ability to endure many different economic environments. A key to the company’s success is management’s focus on only competing in markets that J&J can dominate.
In fact, about 75% of the firm’s revenue is from No. 1 or No. 2 global market share positions. Over 20% of sales are also from new products launched within the past five years, highlighting the company’s ability to continuously innovate and adapt.
Each of J&J’s three operating segments is driven by different factors as well, with the consumer business providing the most predictable cash flow to fund growth in drug investments. This diversification further bolsters the company’s resilience to economic cycles and helps fund innovation and acquisitions.
During recessions, consumers still need to have their medical issues treated. As a result, Johnson & Johnson’s sales only declined by 6.2% during the financial crisis, management continued raising the dividend, and the company’s stock lost half as much as the broader market.
When it comes to buy-and-hold forever dividend growth stocks, they don’t get much better than Johnson & Johnson thanks to its secure payout, outstanding dividend growth track record, unbeatable balance sheet, recession-resistant products, and solid long-term growth runway.
J&J seems most appropriate for dividend investors looking for very safe income from a stock that will almost certainly let them sleep well at night. The company’s scale, product breadth, cash flow generation, R&D budget, and geographic diversification seem likely to keep the firm relevant for decades to come.
While we all understand that long-term investing works, the long-term requires surviving periods of incredible uncertainty such as we’re seeing now.
Every recession has a different collection of causes. But all recessions end eventually, and strong companies like dividend aristocrats not just bounce back, but keep paying safe and rising income during the downturns.
KO, T, O, XOM, and JNJ are reasonably priced, top quality choices that income investors can make today.
Like everything, they are not9 “guaranteed to go up” in the coming weeks or months. But because of very strong financials and fundamentals. Fundamentals that include not just very safe dividends during this unprecedented recession, but long-term growth outlooks which indicate not just a brighter tomorrow, but a gloriously dividend rich future.
As long as you understand that no dividend stock is a bond alternative, and grasp the basics of what a diversified and prudently risk-managed portfolio is and is not, then you can buy these blue chips today with little concern about permanently losing your money in the coming years.
Thank you for making it this far if you’re just getting started in dividend stock investing check out my beginners guide and please drop a like or leave a comment!