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All Contents © 2019The Kiplinger Washington Editors
By Ken Berman, Contributing Writer
| September 18, 2019
It’s easy to predict that a recession will come eventually. They always do. The trick is in the when – and even the most experienced experts take a lot of swings without making contact.
But more strategists and economists are increasing their odds of a forthcoming recession. An August survey by the National Association for Business Economics showed that three of four economists expect a recession by 2021. It could come sooner than that. Also in August, Bank of America analysts said there’s a greater-than-30% chance of a recession within 12 months. In a June interview, economist Gary Shilling said, “I think we’re probably already in a recession.”
There are plenty of potential catalysts. Numerous international central banks are easing their policies to battle slowing economic growth. America’s Federal Reserve is no exception – it just announced the second cut in its benchmark interest rate this year. The U.S.-China trade war is exacerbating things, with a salvo of tariffs weighing on consumers here and abroad. This has been reflected in the Treasury yield curve, which has inverted several times in 2019 – a recessionary warning sign.
Don’t look to these five stocks for recession protection. Many businesses surely will feel the pinch of an economic pullback. But these five better-known names – while fine companies in some respects – have issues such as high debt levels and struggling growth despite the economic expansion that might make a downturn more painful for them than others.
Data is as of Sept. 17. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Market value: $12.0 billion
Dividend yield: 4.1%
Molson Coors’ (TAP, $55.68) sales are the one thing you don’t want in a beer, or a beer company: flat.
In 2016, the company acquired the portion of MillerCoors it did not already own — adding handsomely to its debt load. However, the company’s $11 billion in sales from 2017 shrank to $10.7 billion last year, and Value Line is forecasting the exact same figure for 2019 revenues. Molson Coors’ first-half sales of $6.4 billion are already off from last year’s $6.7 billion.
That top-line struggle reflects shrinkage in Molson Coors’ market share, which has slimmed from 27% in 2014 to 24% last year. That share isn’t going to primary competitor Anheuser-Busch InBev (BUD), either. Its share shrank from 46% in 2014 to 42% in 2018. Growth in the beer market is occurring in the “other” category, which consists largely of craft brewers – another trend vexing TAP and other mega-breweries.
The bulk of Molson Coors sales and profits comes from the “premium light” category via flagship brands Miller Light and Molson Canadian. Notably, Molson Coors does not disclose how much sales and earnings come from Miller Light and Molson Canadian, but it does say this in its most recent Form 10-K: “Our focus brands are Coors Light, Miller Lite and Miller Genuine Draft, which are aligned with global priority brands and account for the majority of our volumes.” The problem is, those brands are what consumers are turning away from, not toward.
And remember: Molson really levered up to buy the remainder of MillerCoors. Long-term debt jumped from $2.9 billion in 2015 to $11.4 billion in 2016. It has whittled that down, but its IOUs still sit at $8.6 billion. The question becomes how heavy that debt will weigh should a recession set in.
Yes, alcohol-related blue-chip stocks might be generally “recession-resistant.” But there are better ways for investors to get their fix than Molson Coors.
Market value: $27.7 billion
Dividend yield: N/A
In The Candidate, a neophyte politician played by Robert Redford unexpectedly wins a Senate seat. At the end of the movie as crowds rush in, Redford looks at his advisors and mouths, “What do we do now?”
That’s what comes to mind when considering Sprint (S, $6.78), which is trying to merge with T-Mobile US (TMUS). It’s hard to determine which outcome is more perilous: the merger going through, or the merger failing.
Even if the deal goes through, the combined entity’s revenues still are less than half of AT&T’s (T) and about 58% of Verizon’s (VZ). Profit margins are considerably better for the two telecom giants, too – but then, Sprint has always had to compete on price to claw customers away from AT&T and Verizon. The market’s saturated – there are few new users left to chase.
If the merger is spiked, the impact could be even more profound. Sprint would be dead-last (in terms of revenues) in a four-man race. And while the Justice Department gave the transaction its green light – thanks to a deal to divest assets to Dish Network (DISH) to make a “new” fourth large telecom – it’s not a done deal. Seventeen state attorneys general are suing to block the marriage, with a trial set for Dec. 9.
That Sprint could find itself back where it started might be palatable if the company’s operating performance was anything to crow about. But that’s not the case. For Sprint’s quarter ended June 30, revenues slipped 3.5% to $8.1 billion, and the company flipped to a net loss. CEO Michael Combes was frank: “While we delivered good results in the first quarter relative to expectations, the business still faces several structural headwinds and I remain convinced the merger with T-Mobile is the best outcome for our customers, employees, industry and all stakeholders.” Forward-looking estimates aren’t promising, either, with analysts expecting a 2.1% revenue decline and a loss of 10 cents per share, down from a penny gain in the previous fiscal year.
Could a recession push people toward Sprint’s (or the combined Sprint/T-Mobile’s) more budget-priced plans? Possibly. But AT&T and Verizon also have shown that they’ll try to compete on price if they must. They also have substantial dividends that can help blunt the effect of share-price losses – something Sprint doesn’t.
Market value: $14.0 billion
Dividend yield: 7.8%
CenturyLink (CTL, $12.81) offers a big-time yield, but its dependability is up for debate. CTL’s high yield is the product of a tanking share price. It actually cut its dividend in February, slashing the quarterly distribution from 54 cents per share to 25 cents. To be fair, this wasn’t a situation in which CenturyLink technically couldn’t afford its dividend – indeed, free cash flow easily covered it. CEO Jeff Storey said at the time the decision was made with the long-term in mind.
“By reallocating more of our capital to leverage reduction, we believe (we) will improve our cost of capital, return a significant amount of cash to shareholders at a very sustainable payout ratio, and provide additional flexibility to respond to market opportunities and any potential interest rate challenges that may occur,” he said.
That leverage mostly came via the $34 billion acquisition of Level 3 Communications in 2017. The debt clearly is problematic enough that the company cut its payout to better tackle it. But more importantly: Level 3 was supposed to “significantly improve our global network capabilities, creating a company with one of the most robust fiber networks in the world.”
However, growth has stalled following the tack-on improvements from 2017 to 2018. Operating revenues for the first half of 2019 have declined 5% year-over-year, though to CenturyLink’s credit, profits climbed from $407 million in 2018 to $717 million, excluding the effect of about $6.5 billion in goodwill impairment.
The efforts to shore up the balance sheet are commendable. But CTL still has a massive debt load, and growth is an issue – especially problematic considering we’re still in an economic expansion. In fact, its consumer business is under a strategic review that Storey expects will be a “lengthy and complex process.” So while the nearly 8% yield sounds nice – especially if you’re planning for a market swoon – CenturyLink doesn’t look like a reliable dividend play in a recession.
Market value: $14.1 billion
Dividend yield: 3.0%
Consumer staples such as Campbell Soup (CPB, $46.69) also tend to be popular recession plays. While people must cut back on numerous things during an economic downturn, they still have to eat, and Campbell addresses that.
But CPB has a few weaknesses that make it stand out as a lesser pick should the economy turn south.
The balance sheet is an issue. Campbell Soup has $7.1 billion in long-term debt versus just $179 million in cash. Moreover, it has total debt of $8.7 billion versus equity of about $1.1 billion, resulting for a whopping debt-to-equity ratio of 7.9, which is several times worse than the average S&P 500 consumer staples company. CPB also has a current ratio (current assets divided by current liabilities) of 0.5; a ratio of less than 1 indicates that a company might have issues paying off its short-term debt. To be fair, Campbell has carried a low current ratio for years, so it’s not an immediate red flag, but it’s far from a buy signal, too.
Most of this debt, by the way, was added as a result of the acquisition of snack food company Snyder’s-Lance. While Snyder’s-Lance has added growth, organic sales in Campbell’s legacy businesses, such as meals, beverages, biscuits and snacks, are falling.
Campbell’s issues have attracted activist hedge fund Third Point, which pushed the company to sell its Garden Fresh Gourmet brand, and has CPB selling off other noncore businesses.
Helming the way forward are CEO Mark Clouse, who was installed in January 2019, and CFO Mick Beekhuizen, who was appointed in August to serve starting at the end of September. Both executives came from outside Campbell.
Campbell Soup has a well-established brand and has an impressive long-term track record. But a weak balance sheet, new management team and struggling business are not the ingredients for success when turmoil hits.
Market value: $33.2 billion
Dividend yield: 3.6%
The knock on General Mills (GIS, $55.03) – owner of brands such as Cheerios, Pillsbury, Betty Crocker, Häagen-Dazs and more – is that the company has failed to generate much organic growth. While projected fiscal 2020 sales of $17.35 billion would represent 2.9% year-over-year growth from FY19, that’s still less in revenues than it made five years ago.
Goldman Sachs analyst Jason English downgraded GIS to Sell, from Neutral, back in May, saying the company was entering its next “chapter” of “mounting deceleration.” Not promising.
This tepid top-line performance comes amid surprisingly few divestitures. That’s OK – you don’t win big by shrinking the company. But it is strange, given that General Mills has said on several occasions, notably at its July 2018 investor day, that it intends on trimming its portfolio. There has been little activity since.
Growth going forward will be a steep climb for General Mills because about 60% of its sales occur in North America, which has become a difficult market. NA revenues declined 2% in its most recent fiscal year, on top of a nearly 1% the year prior.
The only bright spots at the moment appear to be GIS’ convenience-store segment and the recently acquired pet food business. The latter saw net sales and operating profits both grow 11% year-over-year. But those two segments combined for about $3.4 billion in revenues, or about 20% of sales. It’s difficult to see how that 20% will drag the other 80% forward.
Like Campbell, General Mills should still see some demand even in a recession, but there are better consumer-staples names out there.