Recession Risks: Implications for Dividend Growth Strategies

Current economic indicators signaling recession risks

Current economic indicators reveal a mixed picture: while many Americans perceive a recession, economists suggest a higher probability of a soft landing. Global conditions may amplify risks, impacting long-term investment strategies, particularly for dividend growth.

"Though the economy remains healthy by most measures and inflation is well below its peak, many Americans have a pessimistic view of the economy, with more than 50% believing that the U.S. is in a recession." --- (JPM, press release, 2024/07/30)

"In addition, global economic and geopolitical conditions and additional or unforeseen circumstances, developments, or events may give rise to or amplify many of these risks." --- (AMZN, press release, 2024/04/30)

"As a result, all the scenarios included some form of a recession. This year, at least according to the consensus of economists, the probability of a soft landing is quite a bit higher." --- (JPM, event transcript, 2024/05/20)

"and productivity. In addition, global economic and geopolitical conditions and additional or unforeseen circumstances, developments, or events may give rise to or amplify many of these risks." --- (AMZN, sec filing, 2024/Q2)

"So, if you talk about, like, a normal recession with visibility on the cycle, would we change our long-term strategic investment plans, which are always built up from a financial modeling perspective, assuming resilience through the cycle?" --- (JPM, earning call, 2024/Q1)

Historical performance of dividends during recessions

During recessions, companies like Coca-Cola and Procter & Gamble have demonstrated resilience by maintaining or increasing dividend payments. Coca-Cola paid $2.184 billion in dividends in mid-2024, while P&G marked its 68th consecutive year of dividend increases, showcasing strong historical performance amidst economic challenges.

"Dividends During the six months ended June 28, 2024 and June 30, 2023, the Company paid dividends of $2,184 million and $2,089 million, respectively." --- (KO, sec filing, 2024/Q2)

"During the higher points of the commodity price cycle, we are careful not to set dividends at levels that can't be sustained during the lows." --- (XOM, event transcript, 2024/05/29)

"Dividends The company paid dividends of $3.0 billion to common stockholders during the first three months of 2024." --- (CVX, sec filing, 2024/Q1)

"With the dividend increase in April 2024, this marks the 68th consecutive year that P&G has increased its dividend and the 134th consecutive year that P&G has paid a dividend since its incorporation in 1890." --- (PG, press release, 2024/07/30)

"Dividends During the three months ended March 29, 2024 and March 31, 2023, the Company paid dividends of $99 million and $101 million, respectively." --- (KO, sec filing, 2024/Q1)

Sector-specific resilience in economic downturns

Certain sectors, like retail and healthcare, demonstrate resilience during economic downturns. Walmart's strong consumer demand and Pfizer's commitment to dividend growth highlight this stability. Johnson & Johnson's growth targets further emphasize the healthcare sector's potential to support dividends, while Verizon's financial management strategies mitigate volatility risks.

"IntroductionWalmart Inc. (NYSE:WMT) has reached an all-time high in its stock price, buoyed by a recent earnings report that underscores the resilience of consumer demand amidst a challenging economic landscape." --- (WMT, press release, 2024/08/21)

"Our strategy consists of maintaining and growing our dividend over time, reinvesting in our business at an appropriate level of financial return; and finally making value enhancing share repurchases after de-levering our balance sheet." --- (PFE, earning call, 2024/Q2)

"And what I'd love to also reinforce is that we do remain confident that we've got a clear path to achieving our $57 billion commitment that we made back in December at our Enterprise Business Review as well as from 2025 to 2030, delivering above market growth with the 5% to 7% compounded annual growth rate and with growth in every year that being 2025 as well as all of the years beyond that." --- (JNJ, earning call, 2024/Q1)

"Our objectives include maintaining a mix of fixed and variable rate debt to lower borrowing costs within reasonable risk parameters and to protect against earnings and cash flow volatility resulting from changes in market conditions." --- (VZ, sec filing, 2024/Q1)

"We have less upward pressure, but there are some that are still talking about cost increases and we're fighting back on that aggressively, because we think prices need to come down." --- (WMT, earning call, 2025/Q2)

Company strategies for maintaining dividends

Companies are prioritizing dividend maintenance through strong cash positions and strategic capital allocation. Cisco, IBM, Abbott, Medtronic, and 3M emphasize their commitment to dividends while balancing investments and acquisitions, showcasing resilience in their dividend growth strategies amid recession risks.

"We believe that our strong cash and cash equivalents and investments position allows us to use our cash resources for strategic investments to gain access to new technologies, for acquisitions, for customer financing activities, for working capital needs, and for the repurchase of shares of common stock and payment of dividends as discussed below." --- (CSCO, sec filing, 2024/Q1)

"But our primary capital allocation is to invest in our business, both organically, inorganically and to maintain an attractive return to shareholder program with our dividend policy." --- (IBM, earning call, 2024/Q1)

"Dividend and buybacks are--you know, the dividend is definitely core to our investment identity, and we intend to continue to grow our dividend, so that is a balanced approach.Even with all of that, we also, as you’ve probably seen, we have opportunity from a balance sheet perspective to deploy that from an M&A perspective, and we’ve been spending time talking about our strong top line and the pipeline that we’ve developed, and that allows us to be a little bit more selective." --- (ABT, earning call, 2024/Q2)

"Dividend IncreaseThe company today announced that effective May 22, 2024, the Medtronic board of directors approved an increase in Medtronic's cash dividend for the first quarter of fiscal year 2025, raising the quarterly amount to $0.70 per ordinary share." --- (MDT, press release, 2024/05/23)

"My third priority is effectively deploying capital, and our approach remains the same as it's been investing in R&D and CapEx to fund organic growth, paying an attractive dividend which we just recalibrated with the spin of Solventum, maintaining a strong balance sheet and using excess capital for M&A or share buybacks." --- (MMM, earning call, 2024/Q2)

Impact of investor sentiment on dividend policies

Investor sentiment significantly influences dividend policies, as companies like Intel and Disney prioritize liquidity by suspending or reconsidering dividends. Nvidia emphasizes that dividend declarations depend on the Board's assessment of shareholder interests, reflecting how investor confidence shapes these decisions.

"In addition, the Company could undertake other measures to ensure sufficient liquidity, such as raising additional financing, reducing or not declaring future dividends; reducing or stopping share repurchases; reducing capital spending; reducing film and episodic content investments; or implementing furloughs or reductions in force." --- (DIS, sec filing, 2024/Q2)

"We designed our smart capital strategy to enable us to conservatively manage the day-to-day business to trend line growth, while maintaining the operational flexibility to quickly and cost-effectively capture upside when it comes. We are taking the added step of suspending the dividend at the beginning of the fourth quarter, recognizing the importance of prioritizing liquidity to support the investments needed to execute our strategy." --- (INTC, earning call, 2024/Q2)

"Our cash dividend program and the payment of future cash dividends under that program are subject to our Board of Directors' continuing determination that the dividend program and the declaration of dividends thereunder are in the best interests of our shareholders." --- (NVDA, sec filing, 2025/Q1)

"Once for using shareholder assets to push an agenda that those same shareholders are deeply divided about and another time for risking those the value of those shareholder assets by doing just that. Because time and again" --- (NFLX, event transcript, 2024/06/06)

". . . [W]e believe these succession planning challenges have impacted business continuity and distracted from business performance. Other investors and independent proxy advisory firms have also indicated their support for Nelson Peltz and Trian." --- (DIS, press release, 2024/04/01)

Future outlook for dividends in recessionary environments

In recessionary environments, companies like Starbucks and Target are committed to maintaining and even increasing dividends, balancing cash returns to shareholders with strategic investments and debt management. This reflects a broader trend of prioritizing shareholder returns despite economic challenges.

"In this regard, we may incur additional debt, within targeted levels, as part of our plans to fund our capital programs, including cash returns to shareholders through future dividends and discretionary share repurchases, refinancing debt maturities, as well as investing in new business opportunities." --- (SBUX, sec filing, 2024/Q1)

"Later this quarter, we plan to recommend that our Board approve a small increase in the quarterly dividend in support of our goal to build on our decades-long record of annual dividend increases and move toward a 40% payout ratio over time." --- (TGT, earning call, 2025/Q1)

"contracts, may be adversely affected. Inflation and higher interest rates can also constrain the overall purchasing power of our customers for our products and services potentially impacting future orders, especially in a budget constrained environment." --- (LMT, sec filing, 2024/Q2)

"Use of Cash We expect to use our available cash and investments, including, but not limited to, additional potential future borrowings under the credit facilities, commercial paper program, and the issuance of debt to support and invest in our core businesses, including investing in new ways to serve our customers and supporting our store partners, repaying maturing debts, returning cash to shareholders through common stock cash dividend payments and discretionary share repurchases, and investing in new business opportunities related to our core and developing businesses." --- (SBUX, sec filing, 2024/Q2)

"products and services potentially impacting future orders, especially in a budget constrained environment." --- (LMT, sec filing, 2024/Q1)

Key sectors likely to outperform in a recession

Key sectors likely to outperform in a recession include retail, food and beverages, and consumer goods. Walmart and PepsiCo express confidence in their growth and resilience, while Procter & Gamble highlights consistent consumer spending, indicating these sectors may thrive even in challenging economic conditions.

"I'm very excited to introduce our next presenting company, Walmart. Walmart remains a top pick for us, and we continue to see a strong outperformance case over the next 12 to 18 months, driven by share gains and the potential for margin expansion over time." --- (WMT, conference, 2024/06/11)

"So, I feel very good about our ability to continue to outperform our categories in international and to keep our categories growing both food and beverages in the future." --- (PEP, earning call, 2024/Q1)

"If you look at the U.S., I think the key point is over the past one, three, six, 12 months, the category volume growth in our categories is consistently 2%, so consumers are not decelerating consumption across our categories, and similarly if you look at value growth in Europe, it’s also very consistent over the same period, so as Jon said, we’re watching it, but we don’t see it in the data." --- (PG, earning call, 2024/Q4)

"What two or three metrics is Walmart monitoring to internally gauge this? Obviously, the point of the question is trying to understand not only the sustainability of the performance, if the macro does get better, but also the prospect that the outperformance could expand if the environment weakens?" --- (WMT, earning call, 2025/Q1)

Strategies for investors to safeguard dividend income

To safeguard dividend income during recession risks, companies emphasize maintaining healthy dividends through strong cash flow, strategic capital allocation, and debt management. Key strategies include prioritizing growth while ensuring robust balance sheets, as highlighted by Verizon, Coca-Cola, Pfizer, AT&T, and Johnson & Johnson.

"Our dividend is healthy and secure, and our free cash flow dividend payout ratio continues to improve." --- (VZ, earning call, 2024/Q1)

"We have ample capacity to pursue our capital allocation agenda, which prioritizes investing to drive further growth, continuing to support our dividend and staying dynamic, agile and opportunistic. As James mentioned, we're proactively managing our portfolio to deliver on our commitments." --- (KO, earning call, 2024/Q2)

"We plan to maintain and grow our dividend. 2nd, we expect to reduce our debt and delever our balance sheet." --- (PFE, event transcript, 2024/04/25)

"And so, as I've said before, we'll evaluate at that time where things like interest rates stand, we'll evaluate where we are on the dividend yield relative to the equity value, and where we have opportunities for reinvestment in the business and kind of understand what we think the right combination of those are." --- (T, earning call, 2024/Q1)

"We maintain a strong balance sheet, which continues to enable us to strategically invest in and grow our business, while returning capital to our shareholders. Innovation." --- (JNJ, earning call, 2024/Q2)