Like death and taxes, economic cycles are inevitable. Over the years, every period of economic expansion has been followed by a period of contraction or recession. Stock market investors experienced an elongated bull run that began a year after the financial crash of 2008 and ended with the onset of the COVID-19 pandemic.
Several developed countries in North America and Europe pumped billions of dollars in the form of financial grants and benefits to stabilize economic growth amid COVID-19. But these quantitative easing measures increased the money supply resulting in red-hot inflation rates.
In order to offset rising commodity prices, federal banks have hiked interest rates multiple times in 2022, which should result in earnings contraction for most companies in the next 12 months.
According to financial experts, the double whammy of rising interest rates and inflation might also lead to a recession in the U.S. in 2023.
Due to a challenging macro-environment, the S&P 500 index is down 24% from all-time highs. Comparatively, the Nasdaq Composite Index and Dow Jones Industrial Average are down 32% and 20%, respectively, from record levels. Yes, a period of recession can be brutal for equity investors as market sentiment remains bearish.
Here, cyclical stocks are hit the hardest. But there are a few companies that are recession-resistant and are equipped to deliver cash flows across business cycles. Let’s take a closer look at where you can invest if recession fears come true.
NextEra Energy (NYSE:NEE) is a clean-energy-focused utility that is a Dividend Aristocrat, a select group of companies that have increased dividends for at least 25 consecutive years. Due to its expanding base of renewable energy assets, NextEra is well-positioned to keep growing its dividend at a healthy pace in the upcoming decade.
The utility heavyweight derives stable earnings due to the steady demand for gas and electricity it distributes. These earnings are backed by rate-regulated structures and long-term fixed-rate contracts.
NextEra has a sustainable dividend ratio of 60%, lower than the peer group average of 65%, providing it with a margin of safety and the flexibility to fund expansion plans. Its strong credit rating also provides NextEra with access to lower costs of debt.
It has increased dividends by 10% in 2022. Further, NextEra stock currently offers investors a dividend yield of 2% despite returning almost 500% to investors in the last ten years.
Consumer spending falls during recessions as people prioritize expenses and buy lower-priced goods available at a discount. So, discount retailers such as Walmart (NYSE:WMT) remain top bets right now.
The sales trends for Walmart are steady, and customer traffic rose by 1% in the most recent quarter. However, the company warned investors that its profit margins would remain under pressure due to high inventory levels, an inflationary environment, and a strong U.S. dollar.
Tepid sales in Walmart divisions such as electronics and home products are offset by robust sales in verticals including grocery and healthcare.
Walmart stock is reasonably valued and is trading at 0.6x forward sales and a forward price-to-earnings multiple of 22.5x. While earnings are forecast to fall by 9% in fiscal 2023, it’s estimated to rise by 9% in fiscal 2024. The big-box retailer also offers investors a dividend yield of 1.72%.
One of the world’s most popular brands, PepsiCo (NYSE:PEP), is also a recession-resistant stock. Shares of Pepsi are down just 2% in 2022 and have gained over 200% in the past decade. Pepsi owns a wide portfolio of food and beverage brands such as Lipton, Mountain Dew, and Gatorade. In 2021, 23 of these brands generated over a billion dollars in sales.
Further, Pepsi generates more than 40% of its sales in international markets, providing investors with geographical diversity.
Pepsi accounts for 8% of the convenience foods market and 9% of the beverage market. Both these markets are valued at close to $575 billion and are forecast to expand by 4% to 5% annually. Due to Pepsi’s leadership position and pricing power, analysts expect the company to grow earnings by almost 9% annually in the next five years.
Pepsi’s wide economic moat has allowed the company to increase dividends for 50 consecutive years. It offers investors a forward yield of 2.73% currently.
Procter & Gamble
Another consumer staples company, Procter & Gamble (NYSE:PG) , has thrived amid recessions in the past. Its sales were up 7% in the most recent quarter, outpacing rivals, including Kimberly-Clark. In the last 12 months, P&G increased sales by 5% year-over-year. Further, organic sales rose by 7%, which is quite impressive for a slow-moving consumer goods giant.
Procter & Gamble managed to increase its prices in fiscal 2022, expanding its earnings per share by 6%. In the next five years, analysts expect Procter & Gamble to increase earnings by 8% annually. It also increased the number of products it sold while shifting costs toward consumers.
Procter & Gamble is extremely efficient. In the last 12 months, it converted 93% of its earnings into free cash flow. It also allocated $19 billion to shareholders via dividend payments and buybacks.
The final recession-resistant stock on my list is UnitedHealth Group (NYSE:UNH), a company part of the healthcare sector. United Health is a diversified company that offers multiple products and services, including healthcare coverage and benefits services as well tech-enabled services.
The stock has surged close to 1,000% in the last ten years and still provides investors with a dividend yield of 1.3%. United Health’s total addressable market is forecast to grow by 8.4% through 2026, which suggests further upside potential is on the cards for investors.
Analysts expect United Health to rise from $288 billion in 2021 to $349 billion in 2023. Comparatively, its adjusted earnings might rise at an annual rate of 14.3% in the next five years.
Valued at 22x forward earnings and less than 2x forward sales, UnitedHealth remains a compelling bet for investors.
Additionally, UnitedHealth has increased dividends for 12 consecutive years and raised them by 13.8% in 2022. The stock is also trading at a discount of 20% to consensus price target estimates.
The key takeaway
As stated before, recessions are inevitable. So, investors need to construct a diversified equity portfolio to withstand these downturns. The most crucial aspect of creating such a portfolio is to focus on identifying fundamentally strong stocks across sectors with the ability to generate cash flows in good times and bad.
Typically, a diversified portfolio should include several blue-chip stocks that have experienced multiple downturns and have continued to pay dividends to shareholders. Most blue-chip stocks part of recession-resistant industries are relatively stable, allowing you to lessen the blow amid a market sell-off.