Two Recession-Proof Dividend Stocks: Which is the Better Buy?

With inflation soaring and consumers spending less, the pandemic-inspired preference for cooking at home has persisted. It’s good for packaged food companies. The $1.03 trillion US packaged food market is expected to grow at an annual rate of nearly 5% through 2030.

But all is not smooth. To cushion margins from rising labor and transportation costs, packaged food suppliers have steadily raised prices. The risk is that consumers may quickly change their behavior based on price increases. Let’s take a look at two titans of packaged food and where each is headed.

Kraft-Heinz

The Kraft Heinz Company (NASDAQ: KHC) operates the third largest food and beverage company in North America and the fifth largest in the world. With net sales of approximately $26 billion in 2021, Kraft includes more than 200 brands loved by grocers around the world, including Oscar Mayer, Ore-Ida, Kool-Aid, Velveeta and Philadelphia Cream Cheese.

Image source: Kraft Heinz Company.

Co-headquartered in Chicago and Pittsburgh, Kraft Heinz sells its products in nearly 200 countries around the world and retains employees in more than 40 countries. The pandemic has challenged Kraft Heinz significantly, primarily with ongoing supply chain disruptions and price increases. As a result, the mac and cheese mogul’s second-quarter margins fell to 30.3%, down more than four percentage points from the same period last year.

To compensate for shrinking margins, Kraft implemented several rounds of price increases, raising prices by an average of 12.4% in total. But the results have been less than desirable. The Lunchables maker noted a slight slowdown in demand due to rising prices, and a key indicator of sales volumes fell 2.3% in the second quarter.

The burning question on investors’ minds remains: With Kraft Heinz shares trading down around 63% from their 2017 highs, is all that bad news already factored in? CEO Miguel Patricio says 99% of the company’s price increases have already been implemented or announced, and any further increases will be “surgical”.

Combined with the fact that Kraft just raised its 2022 revenue growth forecast from low to high single-digit percent, this stock should see a rally higher.

General Mills

General Mills (NYSE: SIG) not only manufactures many of the world’s favorite cereals like Lucky Charms and Cheerios, but also operates other food brands including Betty Crocker, Yoplait, Annie’s and Blue Buffalo pet foods. The company’s more than 100 food brands add up to a major grocery presence.

After a strong fiscal first quarter, the maker of Cinnamon Toast Crunch recently raised its full-year outlook for organic net sales, earnings per share growth and operating profit. The outlook for organic sales growth and diluted EPS growth were both raised by 2%, a sign of confidence for the remaining three fiscal quarters. And General Mills expects full-year operating profit to grow by as much as 3%.

As with other food suppliers, the high inflation environment has also had an impact on General Mills. While the company has benefited from a sustainable consumer trend of cooking and snacking at home, implementing price increases based on higher operating costs has been tricky. On the one hand, the company has to compensate for the declining margins, but on the other hand, there is a risk that customers will turn to unbranded alternatives.

Despite the challenges, investors seem to like what General Mills does. The stock recently posted new all-time highs for six consecutive months from April to September. This presents a very different investment scenario than Kraft shares, which are trading well below their all-time high.

So should investors buy the Kraft lows or buy the General Mills highs?

To assess which stock is the best buy, let’s compare market caps, price-to-earnings ratios, and dividend yields.

Data source: E-Commerce

A much lower price-to-earnings ratio makes General Mills a more attractive buy, but Kraft Heinz’s superior dividend yield is also attractive to investors. While General Mills might be the best buy in the short term, both of these consumer staple stocks have long-term potential for investors, and both look like solid investments in the years ahead.

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Micah Angel has no position in the stocks mentioned. The Motley Fool recommends The Kraft Heinz Company. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.