For income investors one important factor for the decision of which stock to buy is dividend safety.

During economic upturns most companies benefit from rising profits, but during economic downturns some companies are hit harder than others. Recession resilience therefore is an important data point long-term focused investors should look at.

Stocks from the consumer staples industry are among the most resilient companies when it comes to dealing with the impact of recessions, which is not surprising, as their products are bought by customers whether the economy is doing well or not. 

One sub-category of the consumer staples industry is the packaged food industry, which we will look at more closely in this article.

Packaged food stocks usually are not high-growth stocks, as demand for their products is not growing at an extraordinarily high pace. Through a combination of relatively high and secure dividends, some growth (through rising prices, international expansion or margin growth) and, in many cases, inexpensive valuations, they nevertheless have the potential to deliver attractive total returns.

In this article we will take a look at the 8 dividend stocks from the packaged food sector in our Sure Analysis Research Database that offer the highest expected returns over the coming five years.

Packaged Food Stock #8: Campbell Soup (CPB)

Campbell Soup is a branded convenience products company that sells soups, snacks, packaged fresh food, simple meals, etc. To bolster its healthy foods business Campbell Soup has recently acquired Snyder’s Lance, a $6.1 billion acquisition, which is relatively huge for Campbell Soup, which is valued at $10.4 billion.

Uncertainties about the outcome of this major acquisition as well as recent changes in Campbell Soup’s management have made investors wary of the stock, which explains why Campbell Soup’s share price declined by 38% over the last year.

Source: Earnings Release

Campbell Soup grew its revenues by 15% during the most recent quarter, but the majority of the company’s growth was based on the acquisition of Snyder’s Lance, organic net sales were flat compared to the prior year’s quarter.

For the current fiscal year Campbell Soup forecasts earnings-per-share of $2.85, which would mean a small decrease from 2017’s level of $3.04. Going forward growth will likely be positive again, though, as synergies from the Snyder’s Lance takeover materialize and margins start to expand again.

The steep share price decline in Campbell Soup’s shares has made the price-to-earnings ratio drop to just 12.5, substantially less than the long-term average of 16. Uncertainties about the future and increases in Campbell Soup’s debt levels (the debt to assets ratio is ~90%) will likely mean that the price-to-earnings ratio will remain below 16 for the foreseeable future.

We forecast that price-to-earnings expansion (to a multiple of 15) will be a ~4% tailwind for total returns, in addition we forecast 2% annual earnings-per-share growth. Factoring in the dividend, which currently yields 3.9%, we get to a total return estimate of close to 10% annually over the coming five years.

Packaged Food Stock #7: Kraft-Heinz Company (KHC)

The Kraft-Heinz Company is one of the biggest packaged goods companies, valued at $73 billion this consumer goods giant sells condiments, cheese & dairy, frozen meals, etc. Kraft-Heinz was created in 2015, through a mergerthat was orchestrated by 3G Capital and investor legend Warren Buffett.

Kraft-Heinz has delivered positive earnings-per-share growth in the most recent quarter, but that was primarily due to the impact of lower taxes. Organic sales have declined slightly, although the company’s operating performance will likely improve throughout the remainder of the year.

Source: Earnings Release

Kraft-Heinz is not generating strong growth with its products in the US, but the growth outlook is better in international markets such as Latin America, the Asia-Pacific region and India: Kraft-Heinz’ market penetration is still relatively low in these regions, but the market potential is huge and steadily growing as incomes rise in key emerging markets, which allows consumers to choose higher-priced Western brands. Positive growth in international markets as well as further cost-cutting (which will lead to margin expansion, and which is where 3G Capital is one of the best), should allow for at least mid-single digits earnings-per-share growth over the coming years.

Shares of Kraft-Heinz are trading at ~16 times this year’s earnings, which is substantially less than the valuations Kraft-Heinz has traded at since the company was created – throughout the last couple of years Kraft-Heinz was trading at a price-to-earnings ratio above 20.

Shares will likely not hit that valuation again, but we still see a valuation expansion tailwind of about 1% annually going forward, coupled with earnings-per-share growth of ~5% and a dividend yield of 4.2% this should allow for total returns of roughly 10% a year.

Packaged Food Stock #6: The Hershey Company (HSY)

The Hershey Company is one of the biggest chocolate and sugar confectionary products companies in the world, with renowned brands such as Hershey’s and Reese’s. Despite consumers trending towards being more health-conscious and eating healthier foods Hershey does not have any problems generating top and bottom line growth – when it comes to chocolate and other candy demand by consumers apparently remains strong.

Hershey is not growing sales of its existing brands, but also expanding its portfolio inorganically in markets where it sees strong growth potential, such as with its recent acquisition of Amplify.

Source: Hershey Investor Presentation

Hershey forecasts that sales will grow by 5% to 7% during 2018, earnings-per-share are seen growing by 13% year over year. For a consumer staples company such as Hershey that is an attractive growth rate, although growth will slow down after 2018, as the acquisition of Amplify and tax rate impacts have lapsed.

Hershey trades at a discount to its historic valuation (~17 times this year’s earnings), valuation expansion will therefore be a tailwind going forward. Hershey has solid fundamentals, a dividend payout ratio of just 50%, strong interest coverage and manageable debt levels (long term debt totals just $2 billion, versus a market capitalization of $19 billion). Hershey’s shares have not been volatile at all over the last decade, with a beta of just 0.34 Hershey can thus make a portfolio less prone to up and down movements.

Going forward we forecast total returns of roughly 11%, made up by multiple expansion (~2%), earnings-per-share growth (~6%) and a dividend that currently yields 2.9%.

Packaged Food Stock #5: Flowers Foods (FLO)

Flowers Foods is a food company whose product portfolio includes bread, buns, rolls, snack cakes and tortillas. The company is not overly large, trading at a market capitalization of $4.2 billion, but its history dates back to 1919.

Flowers Foods has paid 63 consecutive quarterly dividends in a row, increased its dividend for over 10 years in a row, including a recent 5.9% dividend raise on 5/24/18. Flowers Foods is a Dividend Achiever.

Operational results were mediocre in recent years, relatively strong results from its organic loaf and breakfast business were offset by sales declines in legacy products such as conventional bread and snack cakes. Consumers trending towards healthier options hurts Flower Foods’ legacy business, which is why profitability hasn’t increased much over the last couple of years.

Management nevertheless is relatively positive about the outlook over the coming years.

Source: Earnings Presentation

In Q1 revenues already improved and hit a new record (compared to previous first quarters), as growth from the company’s healthier products outpaced declines in less healthy choices. As the category with positive growth is gaining in size, this trend will likely persist (and get even stronger), which is why the revenue growth outlook going forward is better than it was over the last couple of years.

Coupled with margin expansion initiatives (Flower Foods has already managed to lower its SG&A expenses whilst being able to grow its top line in Q1) mid-single digits earnings-per-share growth seems highly achievable over the coming years.

Shares trade at 19 times this year’s expected earnings, a small discount relative to how the company was valued in the past, which means that shares could see a small tailwind from multiple expansion going forward (we forecast a positive impact of ~2%). Coupled with ~6% earnings-per-share growth and a dividend that currently yields 3.3% we see total returns of roughly 11% annually over the coming five years.

Packaged Food Stock #4: General Mills (GIS)

General Mills is a well-diversified packaged foods company that sells more than 100 brands in more than 100 countries around the globe. The company is famous for paying dividends for 118 years in a row, an exceptional dividend record that is unmatched by most companies, and that has made General Mills a favorite holding among income investors.

After a major run-up in its share price over the last couple of years investors have been disappointed with General Mills’ performance since the beginning of 2018, as share prices declined by 25% year-to-date, which is due to management cutting forecasts for 2018 as well as due to the fact that rising interest rates made dividend stocks such as General Mills less attractive on a relative basis.

General Mills’ mediocre operational performance has not been a positive either, but General Mills has taken steps towards reinvigorating growth, such as with its acquisition of Blue Buffalo.

Source: General Mills Investor Presentation

Blue Buffalo, a pet food company, is not the first thing that came to mind as an acquisition target for General Mills, but it nevertheless has the potential to drive growth at the company: The pet food industry is growing substantially faster than the packaged food industry as a whole, which should positively impact General Mills’ sales growth going forward. Solid growth rates in the category will also allow for rising margins, which General Mills is eager to achieve, as price wars in its traditional business have hurt margins in the past. Blue Buffalo will, together with organic brands such as Annie’s, be one of the growth vectors for General Mills going forward.

Shares of General Mills are currently trading at 14.5 times this year’s earnings, a discount to the historic valuation, which is why multiple expansion (towards a price-to-earnings ratio of close to 17) will be a tailwind going forward.

The valuation expansion impact (a bit more than 3% a year), earnings-per-share growth (we forecast slightly more than 3% a year) and General Mills’ relatively high dividend yield of 4.4% should allow for total returns of roughly 11% a year going forward.

Packaged Food Stock #3: Kellogg (K)

Kellogg is a breakfast producer that has, over the years, expanded into other packaged food segments. The company, which is valued at $23 billion, has produced solid growth rates in recent quarters.

Source: Earnings Presentation

A strong performance of Kellogg’s snack brands (that offset weaknesses in the cereal business), as well as the impact of acquisitions and forex tailwinds allowed for sales growth of almost 5%.

Kellogg hasn’t been a high-growth business for a long time, and it will never be one, but recently growth rates improved thanks to the company’s focus on the better-performing snack foods business (e.g. Pringles) and on acquisitions, such as RXBAR, which has been very successful. Continuing efforts in improving margins (e.g. cutting overhead costs) and share repurchases will be positives for Kellogg’s earnings-per-share growth as well, which is why we forecast annual growth of ~5%.

The company pays a relatively attractive dividend yield of 3.3%, with the payout ratio being roughly 50% the dividend is safe and has ample room to grow further. Kellogg’s global reach and the non-cyclicality of its business are why the company did not have any problems during the last financial crisis, and it seems highly likely that future recessions will not be a problem for Kellogg, either. Although Kellogg has a relatively high portion of liabilities on its balance sheet (its debt to assets ratio stands at 86%) the company’s interest coverage has improved substantially over the last decade, rising interest rates will therefore not be a major tailwind for Kellogg, either.

Through a combination of mid-single digit earnings-per-share growth (5%-6%), valuation expansion tailwinds (we forecast slightly more than 2% -3% a year) and its dividend, which yields 3.3% right now, Kellogg should be able to deliver total returns of about 11% a year going forward.

Packaged Food Stock #2: Mondelez International (MDLZ)

Mondelez International is one of the largest food processors in the world, being valued at $60 billion right now. Mondelez International is focused on international markets (Kraft Foods, now a part of Kraft-Heinz, was the US-based part of Mondelez International that was spun off into a separate company), which is why the company records relatively high growth rates.

Source: Earnings Presentation

Mondelez International’s strong position in higher-growth, non-US markets(e.g. the AMEA region, where organic sales grew by 3.6% in Q1) allow for solid organic revenue growth rates compared to many other packaged food companies.

In addition to a compelling revenue growth rate (further bolstered by acquisitions), Mondelez International is also executing well on margin expansion initiatives, and last but not least the company keeps repurchasing shares, which further bolsters earnings-per-share growth — during the first quarter of 2018 alone the company has already bought back 1% of its shares. We forecast a ~7% earnings-per-share growth rate over the coming five years, which is higher than the average of the companies featured in this report.

Mondelez International does not have an overly high dividend yield (2.2%), but due to a low dividend payout ratio (35% for 2018) and a solid earnings-per-share growth rate the dividend has a lot of room to grow further, which is why we forecast a high-single digit dividend growth rate over the coming years.

Through its dividend payments, a relatively inexpensive valuation (~16 times this year’s earnings) that leads to valuation expansion tailwinds (we forecast a 3% annual benefit), and a ~7% earnings-per-share growth rate, Mondelez International could deliver total returns of around 12% annually going forward.

Packaged Food Stock #1: JM Smucker (SJM)

JM Smucker is a packaged foods and beverages company whose history dates back more than 120 years. JM Smucker has, over the years, turned into a powerhouse in several foods categories:

Source: Investor Presentation

JM Smucker is well positioned in the spreads business as well as in coffee segment, and, somewhat surprisingly, JM Smucker also holds a large share in the dog snacks market. The coffee and the pet food market are growing at above-average rates compared to other segments of the food industry, which is one reason why JM Smucker has a solid sales growth outlook.

JM Smucker has also initiated strategies to grow its earnings-per-share over the coming years, which includes investments into e-commerce (sales rose 80% year-over-year during the most recent quarter), improving acquisition synergies, driving growth in key brands such as Dunkin’ Donuts (+12% year-over-year in the most recent quarter) and cost-saving programs. Margin pressures have been a headwind in the recent past, but due to the positives we still forecast earnings-per-share growth at a mid-single digits pace over the coming five years.

JM Smucker will continue to raise its dividend, which currently yields 3.0%, at least as fast as its earnings-per-share. Despite a relatively low payout ratio of ~40% JM Smucker thus offers a lot of income generation potential, at the same time the dividend looks very safe.

Shares of JM Smucker trade at a relatively low level as they have declined 20% year-to-date, which has made the price-to-earnings ratio drop to just 12.8. We forecast that the valuation will expand towards the long-term average of 16-17, multiple expansion will therefore be a major driver of total returns over the coming years (we see a 5%-6% annual benefit). Combined with ~5% earnings-per-share growth and a 3.0% dividend yield JM Smucker therefore has the best total return outlook of the companies covered in this article, at 13%-14% annually through 2023.