Let’s talk about recession-resistant dividends, because if history is any guide, we are definitely on the verge of a slowdown, if we aren’t already in one. Here at Contrarian Outlook, we’ve been preparing for weaker economic data, and our recession dividends have already delivered.
Why the focus on hedging against economic downturns? The Federal Reserve started raising interest rates over two years ago, which is about the time when financial markets usually crash. And indeed, the Japanese yen caused a VIX increase last seen in the 2008 and COVID crashes.
Our focus in the recession recently has been on defense. Stocks like utilities, with higher yields but slower earnings growth. Today we play attack— and aim for a total return of over 15% per year doesn’t matter of what the market is doing.
The trick is that we focus on companies that can grow Sales by a slowdown. Yes, these are fortress business models that generate steady cash flows. Stock prices that move independently of the yen! And tickers that do not march to the beat of the weekly economic data. It is the top line Action that makes these stocks most exciting.
Let’s start with UnitedHealth Group (UNH)most recently presented in my Made for 2024 Dividend Plan. We buy health insurance on dips—all kinds of dips!—because it has a captive audience.
The company increases its dividend significantly yearlyOver the last decade, UNH has increased its distributions by an incredible 460%.
The stock price over the same 10-year period? A 540% increase. The ticker tracked the payout like a puppy – and then shot up recently!
UNH’s “dividend magnet”
Source: Income calendar
The ever-Uprising Dividend is the result of ever-increasingly Cash flow. UNH’s steady growth isn’t just luck. Management had the foresight to create its own technology-focused Optum unit in 2011. Optum provides pharmacy services, operates clinics, and delivers data analytics and other cutting-edge technologies to optimize healthcare delivery.
Revenues have nearly quadrupled since UNH launched Optum. This cash cow remains well fed in all Economic environment. Perfect for a slowing economy.
UNH has rewarded us with 13% total returns since we last discussed it in January. The stock has exceeded my “buy-up-to” price of $550 that we set in my Hidden returns Portfolio. Be prepared to add when prices decline.
Blue-chip biotechnology Amgen (AMGN) is another dividend grower with no correlation to financial headlines and an underrated sales catalyst.
I’m old enough to remember when investors paid as much for biotech as they do for AI darlings today. In the early 2000s, however, investors bought Amgen for hype rather than substance. They paid more than 20 times the annual Sales for the right to own Amgen! These vanilla guys just had to have this biotechnology.
Paying 20 times the turnover for something is generally a bad idea. Even if the company had perfect profit margins of 100% (which is impossible) and could pay out 100% of those profits as dividends (also impossible), its maximum return would be about 5% per year.
Not great. That’s why Amgen stock didn’t move from 2000 to 2012. Yes, the company was growing and generating positive free cash flow the whole time. But the stock was dead money because, well, the price we pay for a share Affairs.
Amgen is now a grown-up company with a profitable business, increasing dividends and all the trimmings. As a mature company with cash flow, the stock gets written down from time to time! (Ah, life.) Most recently, Amgen shares fell nearly 19% from their February 1 high.
Many established companies like Amgen struggle to grow their sales. That’s the curse of big numbers. But at Amgen, that’s rarely a problem. When the drug development pipeline is thin, management will use capital to buy a promising drug candidate or even an entire pipeline!
The recent acquisitions are paying off. Amgen’s sales are not only growing, but AccelerateIn recent years, Amgen has been buying aggressively:
- In 2021, Amgen acquired TeneoBio for $2.5 billion to gain access to its early-stage “Cell Engager” antibody, which has potential applications in oncology.
- The following year, 2022, Amgen acquired ChemoCentryx for $3.7 billion to expand its portfolio of treatments for autoimmune diseases.
- And in 2022, Amgen acquired Horizon Therapeutics for $27.8 billion in the largest acquisition in its history. The prize was Horizon’s blockbuster drug Tepezza, a treatment for thyroid eye disease.
The topic here is rare diseases. Today, more than 10,000 of them are known, but only 5% have approved drugs. As an established biotechnology company, Amgen has the mix of research and development and manufacturing know-how to bring these drugs to market.
Competition in rare diseases is low and the addressable markets for these treatments are adding up. Since 2020, Amgen has increased its sales of rare disease products from $2.2 billion to $3.9 billion. Here’s why Amgen’s sales are increasing:
Products for rare diseases increase sales
Does it matter to Amgen if the Federal Reserve cuts interest rates by 25 or 50 points in September? Of course not.
The only downside to Amgen is that it has recovered so quickly (21% return, good for 68% annualized!) since we added it to our Hidden returns Portfolio in April that the stock is now a hold. I wouldn’t chase it here.
Instead, consider the health star of 2021 that is finally cheap again. Remember it?
Top landfill items of 2021
I don’t want do you remember that? Me neither. Sorry to bring up the past. I’m just doing it to point out the group of people who sorely miss these rapid tests: Abbott Laboratories (ABT) shareholders.
Every use of a rapid test, whether mandatory or voluntary, was another sale for Abbott. Whether the tests were paid for by Uncle Sam, an insurance company, or my credit card at CVS, all sources represented large amounts to Abbott.
Sales rose from 32 billion to 45.5 billion dollars in just over two years. That is large Growth from an already large number! Of course, the “test mania” – thank God! – did not last forever. As it subsided, Abbott’s sales also declined, until now:
“Testmania” has shaken Abbott’s top line
Abbott caught our attention because investors discarded this ticker symbol along with their used cotton swabs when demand for testing kits waned. Goodbye, boogers—and Abbott.
To add to the bear market trend in Abbott shares as test kit sales peaked, 2022 has happened. Higher interest rates and quantitative tightening sent the stock market lower, with Abbott losing 36% from its peak to its trough.
Nevertheless, management continued to increase its dividend. Abbott’s core business was doing well. Sure, demand for test kits had peaked, but that was predictable. The payouts could keep going up and up!
Abbott’s dividend magnet is unimpressed by the test kit mania
Health and wellness trends and fads come and go. And Abbott is here to capitalize on them!
Replace rapid tests with a shake
An example of this is the recently launched protein shake PROTALITY. When people are trying to lose weight (through calorie restriction, taking medications or weight loss surgery), getting enough nutrients is a challenge. PROTALITY is packed with protein, vitamins and minerals to support this.
Sure, there are plenty of protein and greens powders out there. But few of those suppliers have as good a connection to the distribution channels as Abbott. I’m not talking about sponsoring a health podcast here and there. PROTALITY is available at retailers like Walmart and CVS, as well as Amazon.
While recovering from Achilles tendon surgery, I was told to consume as much protein as my body weight in grams. For me, that was 200g of protein per day. I can tell you from experience: good luck consuming that much protein without a shake or two!
PROTALITY and current products are causing Abbott’s sales to rise again. The company’s organic sales growth Minus COVID test kits will account for 8.5 to 10% over the course of the year. A remarkable sales growth for such a large company!
The decline in test kit sales continues to cloud Abbott’s near-term outlook, but it won’t be clouding the windshield for much longer.
COVID test kits are becoming a getting smaller Part of Abbott’s revenue. Sales are rising again and will continue to accelerate as demand for test kits declines.
A 36% drop in a “recession-resistant” stock like Abbott is exactly what we mavericks live for.
And there are even better buys than Abbott here. A slowdown will not slow down these dividend growers! We will be in the Friday edition of Hidden returns.
But I just checked your subscription status and we don’t have you as an active subscriber of Hidden returns. Don’t miss my new recession-resistant dividend call coming this Friday! Request your risk-free trial to Hidden returns Here.
