3 Mega-Cap Stocks for Recession-Proof Dividends
Mega-cap stocks are defined as stocks with market capitalizations above $200 billion. These represent the largest businesses in the world. Mega-cap stocks have built-in competitive advantages such as strong brands and global scale.
Since they are larger and generally more stable businesses, mega-cap stocks could outperform small-caps or mid-caps in a bear market. As a result, investors looking for quality stocks with reliable dividends in a recession should consider the following 3 mega-cap stocks.
Mega-Cap Stock: Apple (AAPL)
Apple (NASDAQ:AAPL) is a technology giant that manufactures devices such as iPhones, iPads, Mac, Apple Watch and Apple TV. Apple also has a services business that sells music, apps and subscriptions. Apple’s market cap exceeds $2 trillion.
The tech sector is usually notorious for volatility during recessions. But Apple stock is a very stable company, even for a tech stock. In the most recent quarter Apple generated revenue of $97.278 billion, an 8.6% increase compared to Q2 2021. Product sales were up 6.6%, led by a 5.5% increase in iPhones (52% of total sales). Service sales increased 17.3% to $19.8 billion and made up 20% of all sales in the quarter. Earnings-per-share of $1.52 per share rose 8.6% year-over-year.
Going forward Apple’s earnings growth will be driven by several factors. One of these is the ongoing cycle of iPhone releases. In the long run Apple should be able to grow its iPhone sales. Moreover, in emerging countries where consumers have rising disposable incomes, Apple should be able to increase the number of smartphones it is selling in the coming years.
In addition, Apple’s Services unit which consists of iTunes, Apple Music, the App Store, iCloud, Apple Pay, etc., has recorded a significant revenue growth rate in recent years. Services revenues grow at a fast rate and produce high-margin, recurring revenues.
Apple is arguably the safest tech stock, not just because of its huge size and stable business model, but also because of its tremendous balance sheet.
As of the most recent report Apple held $51.5 billion in cash and securities, $118.2 billion in current assets and $350.7 billion in total assets (of which an additional $141.2 billion are non-current securities) against $127.5 billion in current liabilities and $283.3 billion in total liabilities.
Shares currently yield 0.7%, which is a fairly low yield. However, Apple is a strong dividend growth stock. The company has come through with 10 years of consecutive dividend increases since initiating its dividend a decade ago. In April, the company increased its dividend by 4.5%. And with a 2022 expected dividend payout ratio of just 15%, Apple has plenty of financial cushion to continue increasing its dividend each year, even in a recession.
Walmart (NYSE:WMT) is a discount retailer and dominates the industry. It is the largest retailer in the world, serving more than 230 million customers each week. Annual sales reach nearly $600 billion for Walmart, and the stock has a market cap above $300 billion.
In the 2022 first quarter, revenue grew 2.4% to $141.6 billion. Adjusted earnings-per-share came to $1.30 for the quarter. Comparable sales were up 3% year-over-year in the U.S., and up 9% on a two-year stacked basis. eCommerce growth was 1% year-over-year, but up 38% on a two-year stacked basis as demand for online shopping continues to grow.
Sam’s Club comparable sales rose 10.2% year-over-year, and the two-year value was +17.4%. Membership income at Sam’s Club was up 10.5% year-over-year.
We have a positive long-term outlook for Walmart’s earnings growth, even with the near-term challenges of inflation. The company continues to buy back stock as well, which is a tailwind for earnings-per-share growth. We see low single-digit sales growth each year, with its e-commerce business being the primary driver of top line growth. That combination should be good enough to create mid-single-digit growth without the benefit of margin expansion.
Walmart is one of the most recession-proof business models in the entire stock market. During recessions, consumers usually shift their spending habits, seeking out lower prices. It could actually be argued that Walmart benefits from recessions.
To that end, consider that Walmart managed to increase earnings steadily during and after the Great Recession of 2007-2010. Hard economic conditions tend to send consumers on the margins to Walmart, which is also an advantage. A similar dynamic played out during the coronavirus pandemic, when Walmart remained highly profitable.
Walmart has increased its dividend for over 40 years, making it a Dividend Aristocrat. Shares currently yield 1.8%. The stock has a 2022 dividend payout ratio of 35%, indicating a safe dividend.
Mega-Cap Stock: Pfizer (PFE)
Pfizer (NYSE:PFE) is a global pharmaceutical company that focuses on prescription drugs and vaccines and has a market cap above $270 billion. Pfizer’s new CEO completed a series of transactions significantly altering the company structure and strategy. Pfizer formed the GSK Consumer Healthcare Joint Venture in 2019 with GlaxoSmithKline plc, which includes Pfizer’s over-the-counter business. Pfizer owns 32% of the JV. Pfizer spun off its Upjohn segment and merged it with Mylan forming Viatris for its off patent, branded and generic medicines in 2020.
The company is seeing strong growth right now from several factors, such as new products as well as its Covid-19 therapies. In the first quarter, revenue rose 77% to $25.66 billion. Adjusted earnings-per-share soared 72% year-over-year.
Pfizer generated nearly $15 billion in revenue last quarter just from its Covid-19 vaccine and anti-viral drug. While this boost is likely to fade over time as the pandemic subsides, the mRNA vaccine technology will be tried in two protease inhibitor antiviral compounds, a flu vaccine, a shingles vaccine, a breast cancer therapy, hemophilia gene therapy, a Lyme vaccine, RSV Adult vaccine, and others.
Therefore, this could be a longer-lasting tailwind than the market realizes. Pfizer completed its acquisition of Arena Pharmaceuticals for etrasimod and announced the acquisition of ReViral for its RSV programs.
Overall, Pfizer has a strong pipeline in oncology, inflammation & immunology, rare diseases, and vaccines. We are expecting 5% earnings per share growth out to 2027 (beside the COVID-19 vaccine and anti-viral). This should be enough growth to continue raising the dividend over time, which currently yields 3.3%.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.