Central banks around the world are raising interest rates to temper demand and counteract persistently high inflation. In this situation it makes sense to look for companies whose revenues and growth are relatively insensitive to the economic cycle – those with products or services that are always in demand.
One good way of finding these is to look for firms that consistently generated a high return on capital (a key gauge of profitability) over the last economic cycle. As the outlook for inflation and interest rates remains uncertain, it is also important to identify businesses with robust balance sheets. Those that meet these criteria often pay nice, predictable dividends that grow throughout the economic cycle.
Life-changing treatments
AbbVie (NYSE: ABBV) develops drugs related to immunology, oncology, virology, and neuroscience. The company, which was spun-off from Abbott Laboratories in 2013, generates 60% of revenue from its blockbuster arthritis drug, Humira, but it also has a strong pipeline of next-generation immunology and blood-cancer drugs.
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The company’s mature drugs have expiring patents, but manufacturing and dosing complexities limit competition. AbbVie has also made moves to diversify revenue via the acquisition of Allergan – the maker of medical and cosmetic aesthetics products, including Botox.
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With post-acquisition operating cash flows of close to $20bn, AbbVie is well placed to continue financing dividends, share buybacks, debt payments and further deals. In fact, since its spin-off, the company has grown its dividend by an annualised 13%.
A consumer-goods giant
Nestlé (Switzerland: NESN), the world’s largest food and beverage company by revenue, has over 2,000 brands, 34 of which have annual sales greater than $1bn. These include Nescafé, KitKat, Smarties, and Milo. Well-known brands, strong existing relationships with retailers and economies of scale provide Nestlé with an enduring competitive advantage, while good product diversification and geographical reach ensure low cyclicality for its goods.
Nestlé boasts a high steady return on capital and a strong balance sheet with low leverage; this has enabled it to grow its dividend for the past 26 years. Recently the business has been undergoing strategic portfolio adjustments to focus on higher growth and more profitable categories.
Topping up Japan’s health system
Aflac (NYSE: AFL) is the top US-based provider of supplemental health and life insurance to individuals in the US and Japan. Some 70% of revenue is generated via Aflac Japan, where customers purchase medical-insurance policies to fill gaps in the national health insurance system. The company reports that 95% of its Japanese policyholders renew their policies, with the average customer remaining with Aflac for 20 years. This provides recurring revenues and cash flows, which have grown over time owing to the ageing population.
The deregulation of Japan’s financial system has allowed Aflac to sell its policies through banks or the post office, where Japanese customers are used to conducting financial transactions. The company’s strong balance sheet – which has little debt – has supported 39 consecutive years of dividend growth.
