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Which Defensive Dividend Stock Is Most Recession-Resilient?

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·5 min read
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It's been a bloodbath for the broader markets this year, with high-multiple tech and the biggest 2020-21 pandemic beneficiaries taking on the most damage. With the S&P 500 recently falling into a bear market, many defensive dividend payers have also been dragged lower in recent months.

With an economic recession a growing possibility, it's the most defensive of dividend stocks that appear like the safest bets at this juncture. Nobody wants to catch a falling knife these days. It's too painful, especially with a hawkish Federal Reserve.

In this piece, we used TipRanks' Comparison Tool to evaluate three dividend stocks that have been remarkably resilient this year. Though they may have limited bounce-back potential if markets do ricochet, their dividends and low correlation make them compelling ways to play defense.

General Mills (GIS)

General Mills is a consumer-packaged goods firm that makes the breakfast cereals that we're all likely familiar with. As one of the steadiest consumer staples, it should come as no surprise to see shares up 3% year-to-date as the broader markets imploded into a bear market.

With a 3% dividend yield, a 0.45 beta, and a modest 18.45 times trailing earnings multiple, GIS stock appears to be an intriguing play in the face of an ugly recession.

The company is pushing to improve its ESG rating, with ambitious sustainability goals in place. While it is trendy, such efforts aren't just to appease the ESG investors out there. Investing in regenerative agriculture could lead to substantial cost savings over time.

Further, an improved environmental track record could also beckon in more customers, leading to modestly enhanced sales. Undoubtedly, environmental responsibility is of growing importance to a wide range of consumers.

Though General Mill's ESG plans will not pay major dividends anytime soon, I do think the firm is on track to better itself as the broader economy moves through a potential downturn.

Consumer packaged foods, baking products, pet foods, and other necessities are unlikely to suffer from the same demand destruction as discretionary firms when times get tough.

More consumers may opt to cook from home to save money. General Mills expects at-home food demand to stay higher than pre-pandemic levels. If a recession does happen within the year, such demand may surpass the company's expectations.

With that in mind, General Mills stock should be trading at a more premium multiple, even with concerns about a Fed-induced downturn.

Turning to Wall Street, analysts are neutral with the average General Mills price target of $68.40, implying 1.07% downside from current levels. (See GIS stock forecast on TipRanks)

Kellogg (K)

Turning to another popular cereal maker, we have Kellogg, which sports a 3.3% dividend yield, at the time of writing. Like General Mills, Kellogg is a consumer staple that's outperformed the broader markets of late, up 9% on a year-to-date basis. Such outperformance could easily continue if worse comes to worst and the U.S. economy sinks into a recession by early-2023.

At writing, shares trade at 15.7 times trailing earnings and 1.6 times sales. On trailing earnings and revenue fronts, Kellogg is a cheaper staple than General Mills. Though Kellogg has suffered from the effects of higher inflation, which applied upward pressure on costs, the firm's focus on higher-margin businesses could help the firm offset inflation's impact with time.

Undoubtedly, few firms have been immune from the effects of inflation. With strong brands, the firm should be able to continue passing higher prices to consumers.

Sure, some degree of pricing power accompanies Kellogg's brand. However, many consumers have been looking to lower-cost private-label brands in an effort to save money in the middle aisles of the grocery store. With that, Kellogg needs to be strategic when hiking prices such that sales are not considerably eroded.

Wall Street is also neutral on the name, with the average Kellogg price target of $71.31, implying 1.22% upside from today's levels. (See Kellogg stock forecast on TipRanks)

Exxon Mobil (XOM)

It's not just the consumer-packaged goods firms that have bucked the trend, surging higher in the face of a bear market. Energy stocks have been incredibly hot, surging while almost every other sector faced pressure. Year-to-date, XOM stock is up over 48%. Since its October 2020 bottom, the stock is up a whopping 189%. Indeed, the windfall of much higher WTI prices has done Exxon a lot of favors.

Recently, the company clocked in stellar first-quarter earnings. The company is quickly turning into quite the cash cow. Debt levels are falling, and management tripled down on its share repurchase program. Undoubtedly, the firm's $30 billion buyback plan suggests the XOM's managers view the stock as undervalued. Given the likelihood that higher oil is here to stay, XOM shares may still be cheap, even after nearly tripling in under two years.

At writing, XOM stock trades at 15.7 times trailing earnings and 1.3 times sales. The nearly-$400 billion energy company could become much cheaper as it continues reaping the rewards of $110 oil. With that in mind, the 3.72%-yielding blue chip looks hard to pass up here.

Wall Street is bullish on the name. That said, the average Exxon Mobil price target of $94.53 implies just a 0.14% return from current levels. (See XOM stock forecast on TipRanks)

Conclusion

Consumer-packaged goods and energy stocks have been two places to hide from broader market volatility. Though Wall Street analysts are quite muted on the names, their dividend yields are compelling.

Of the three dividend stocks, Wall Street seems most bullish on Exxon Mobil. That said, with nearly zero in the way of implied upside, price target upgrades on XOM may be in order if analysts covering the name still think it's a Buy.

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