Income oriented investors are oftentimes concerned with the reliability of the dividend payments from their investments during recessions or economic downturns. Some companies are more impacted by a weak economy, whereas other companies do not really face a large impact from economic downturns.

One group of companies that has performed solidly during past recessions are the consumer staples dividend stocks. These consist of companies that produce everyday goods such as packaged foods, drinks, toothpaste, shampoo, etc. Consumers need these goods, even during bad times, which is why the revenues and earnings of consumer staple companies mostly don’t see large hits during recessions. Due to the stability of their profits, consumer staples companies are also mostly able to maintain their dividends during downturns, which makes them suitable for income investors that are more risk-averse than others.

In this article, we will take a closer look at Kellogg (K), which is a consumer staple company with a compelling total return outlook over the coming years, coupled with attractive risk characteristics.

Company Overview

Kellogg is a food company that produces and sells ready-to-eat cereal and convenience foods. Its segments are divided into US Snacks, US Morning Foods, US Specialty Channels, and various segments for its international operations. Kellogg’s product portfolio includes snacks, crisps, crackers, cereal bars, cereal, frozen foods, and many more. Kellogg operates in about 180 countries around the globe, which gives the company significant international exposure.

Kellogg was founded in 1906 and is headquartered in Battle Creek, MI. Kellogg is not the largest food company by far, but it sports a respectable market capitalization of $19 billion right here.

Investing in Growth

Kellogg is, like many of its peers, not a high-growth company. During the most recent quarter the company grew its revenues by 3.5%, but reported revenue growth was positively impacted by a one-time item. Kellogg’s organic revenue growth rate was just slightly positive during the first quarter.

Kellogg plans to improve its growth rate during the next couple of years, through increased investments in its international operations, and through the introduction of new products in higher-growth product categories. By introducing healthier versions of existing products, such as healthier cereal, Kellogg plans to capitalize on trends such as cleaner eating.

Even with its investments into new markets and new products, Kellogg will likely nevertheless not produce outsized growth going forward. We believe that it is reasonable to assume that Kellogg will grow its earnings-per-share by 5% over the coming five years, for a solid, but unspectacular growth rate.

Total Return Outlook Is Positive Nevertheless

Despite the fact that Kellogg’s growth outlook is not especially strong, we still forecast compelling total returns for Kellogg’s shareholders over the coming years. This is due to the fact that dividend proceeds and multiple expansion should allow for total returns that are considerably higher than the earnings-per-share growth rate alone.

Kellogg’s dividend yields 3.9% right here, and thanks to a payout ratio of less than 60% Kellogg’s dividend looks quite safe for the foreseeable future. Multiple expansion could be a tailwind on top of that, but even if Kellogg’s valuation would not expand going forward, the combination of a mid-single digit earnings-per-share growth rate and a dividend that yields close to 4% would result in forecasted total returns of roughly 9% annually.

Takeaway

Kellogg operates a recession-resilient business, as demand for cereal and ready-to-eat foods does not decline materially during economic downturns. Kellogg’s dividend is well-covered by the company’s net profits, which means that the company’s dividend, which yields roughly twice as much as the broad market, looks sufficiently safe right here.

Kellogg is a good example of a consumer staples company that does not generate overly high growth rates, but that could generate compelling total returns going forward, while also being less vulnerable to recessions compared to many other companies from different industries.