Photo by Chris Liverani on Unsplash
 

Income-oriented investors should do their best to identify companies with a meaningful business moat, resilience to recessions, and commitment to grow their dividends year after year. This task has become markedly challenging in recent years, as competition has heated more than ever in almost every sector. In this article, we will discuss the prospects of three stocks that are ideal for rising passive income, namely PepsiCo (PEP), Enbridge (ENB), and AbbVie (ABBV).
 

PepsiCo

PepsiCo is a global food and beverage giant, with annual revenues of $84 billion. Its product portfolio includes Pepsi, Mountain Dew, Frito-Lay chips, Gatorade, Tropicana orange juice, and Quaker foods. The company has more than 20 brands with annual revenues of more than $1 billion.

PepsiCo is facing a secular headwind in its flagship business due to the increasing health consciousness of consumers. The consumption per capita of carbonated drinks has declined to a nearly 30-year low level. In addition, some U.S. states and some countries have imposed excessive taxes on sweet beverages in order to reduce their budget deficits. Due to these headwinds, the beverage segment of PepsiCo has lackluster growth prospects.

On the bright side, the snack business of PepsiCo is growing much faster. In addition, the company is doing its best to adjust to the shift in consumer preferences. It has created a “Better for You” product line, which targets health-conscious consumers. In addition, it has drastically reduced its dependence on its flagship beverage products. The Pepsi-Cola trademark currently generates only about 10% of the total sales of the company. Moreover, PepsiCo has consistently taken advantage of the inelastic demand for its products and thus it has raised its prices faster than the rate of the consumption decline.

The successful adjustment of PepsiCo to the changing business landscape is reflected in the performance record of the food and beverage giant. PepsiCo has grown its earnings per share by 5.3% per year on average over the last decade. The primary growth drivers have been the organic growth of Frito-Lay North America and the expansion of the company in emerging markets, which are characterized by much faster growth than developed markets. As these growth drivers are likely to remain in place for years, PepsiCo is likely to keep growing its earnings per share at a mid-single-digit rate for the foreseeable future.

Thanks to its strong business model and its reliable growth trajectory, PepsiCo has become a Dividend King, with 50 consecutive years of dividend growth. The stock is currently offering a nearly 10-year low dividend yield of 2.5% but it is expected to raise its dividend in June. Given its reasonable payout ratio of 68% and its resilient business model, the company is likely to continue raising its dividend for many more years.
 

Enbridge

Enbridge is a midstream oil and gas company, which is headquartered in Canada and operates in four segments: Liquids Pipelines, Gas Transmission, Gas Distribution, and Green Power. It is a huge midstream company, with immense pipeline networks, transporting approximately 25% of North America’s crude oil and 20% of the natural gas consumed in the U.S. It is also the largest distributor of natural gas in the U.S. by annual volumes.

While the energy sector is infamous for its dramatic cyclicality, Enbridge is a bright exception, as it has one of the most defensive business models in the energy sector. It has a toll-like, fee-based model, which involves charging fees to customers for all the products they transport through the pipeline networks of the company. Enbridge has contracts with minimum-volume requirements and thus it enjoys reliable cash flows even during downturns when its customers transport much lower volumes than normal.

Thanks to its defensive business model, Enbridge has an exceptional distribution growth record (for an energy company). It has grown its distribution (in CAD) for 27 consecutive years, at a 10% average annual rate. Moreover, the MLP has a promising pipeline of growth projects that are related to the expansion of its network, and hence it is likely to continue raising its distribution for many more years.

Enbridge is offering an above-average distribution yield of 6.8%. Given its healthy payout ratio of 68% and its reliable business performance, the MLP is likely to continue raising its distribution for many more years.
 

AbbVie

AbbVie is a biotechnology company focused on developing and commercializing drugs for immunology, oncology, and virology. It was spun off by Abbott Laboratories in 2013.

AbbVie has a history of less than a decade as a standalone company but it has an exceptional performance record. Since its spin-off, AbbVie has grown its earnings per share every single year, at a 17% average annual rate. Thanks to the essential nature of its products, the pharmaceutical giant has proved immune to the coronavirus crisis. It grew its earnings per share by 18% in 2020 and by 20% in 2021 and is expected to report a 9% growth of earnings per share for 2022.

AbbVie is currently facing a threat due to the patent expiration of its blockbuster drug, Humira, in the U.S. this year. Humira is used in the treatment of rheumatoid arthritis and currently generates about one-third of the total revenue of the company. Its patent expired in Europe in late 2018 and caused a 31% plunge in revenues in 2019 and a 14% decrease in revenues in 2020.

On the bright side, AbbVie has done its best to mitigate the effect of the expiration of the patent of Humira in the U.S. The company has developed two other auto-immune drugs, Rinvoq and Skyrizi, which are likely to provide a strong buffer after the expiration of Humira. Notably, AbbVie generated 43% of its total revenues from Humira in 2020 but only 34% of its total revenues from Humira in the most recent quarter. To cut a long story short, AbbVie is likely to manage to contain the effect of the expiration of the patent of Humira. To alleviate the anxiety of investors, AbbVie has stated that its total revenues in 2025 will be higher than those in 2020.

Thanks to its impressive record of earnings growth, AbbVie has raised its dividend every single year since its spin-off, at an average 5-year annual rate of 17%. The stock is currently offering a 3.7% dividend yield, with a healthy payout ratio of 43%. Given also its strong balance sheet and its resilience to recessions, AbbVie is likely to keep raising its dividend at a double-digit rate for many more years.
 

Final Thoughts

The Fed is raising interest rates aggressively in order to restore inflation to its long-term target of 2%. Due to these interest rate hikes, the risk of an upcoming recession has significantly increased. It is thus critical for investors to identify stocks that are resilient to recessions. The above three stocks certainly meet this criterion. Given also their strong business models and their reliable growth trajectories, they are likely to offer rising passive income to their shareholders for several more years.

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