A recession is generally defined as two straight quarters of declines in gross domestic product (GDP). In other words, if an economy contracts over six months, then it is said to be in a recession. Earlier in June, the National Bureau of Economic Research announced that the U.S. economy is officially in a recession. Therefore today, I’d like to discuss three recession-proof stocks to buy for long-term portfolios.
Over the past several weeks, most states have been opening up their economies. Yet, recent headlines suggest that several of the states that have been the first ones to lift lockdown restrictions are now reporting an increase in the number of novel coronavirus cases. Thus investors are increasingly nervous about the adverse health and economic effects of the pandemic.
Sanjiv Sabherwal, Goolsby-Fouse Endowed Chair and Professor of Finance, University of Texas at Arlington, says:
“I believe we need to maintain a balance between opening the economy and controlling the spread of the virus. If we open the economy too fast and without businesses, other organizations, and people following the best practices that inhibit the proliferation of the coronavirus, we run the risk of a surge in the virus and having to shut down again. On the other hand, we cannot afford to have the economy closed for a very long time.”
While authorities work to strike the right balance between the level of restrictions and how soon life can go back to normal, investors wonder how they can recession-proof their portfolios.
In investing, risk and return go together. And diversification is all about reducing risk. Although it’ll not eliminate all the risks in your equity portfolio, your long-term risk/return ratio is likely to be more attractive. That is especially important in a recession.
Once market participants have decided how much of their wealth they’d like to have in equities, they should ideally consider allocating the sum among different types of shares.
Certain industries and stocks tend to do better during recessions. Defensive shares may help investors protect their capital and still get acceptable returns, especially in times of economic uncertainty. If they also provide robust dividends, it’s the icing on the cake. Receiving regular dividends enables investors to have a constant stream of passive income.
For starters, food manufacturers and supermarkets, which are consumer staples, are generally resilient. After all, no matter how bad the economy is, we’ll all have to eat and buy household goods as well as personal hygiene items.
Other defensive shares may also be appropriate for a recession. For example, healthcare companies and utilities are also among defensive shares.
Besides, a large number of investors regard commodities and especially gold as “safe havens” during financial struggles. When the price of gold increases, gold mining companies usually have a bright time too.
With that in mind, here are four recession-proof stocks that you may want to research further:
Let’s dive a bit deeper into what makes each a safer bet than some of the other stocks on the market right now.
Recession-Proof Stocks to Buy: Archer-Daniels-Midland (ADM)
Current Price: $40.48
52-week Price Range: $28.92-$47.20
Current Dividend Yield: 3.56%
Chicago, Illinois-based Archer Daniels Midland is the world’s premier agricultural origination and processing company. It was incorporated in 1923, as successor to the Daniels Linseed Co. founded in 1902.
Today, it is one of the world’s leading producers of ingredients for human and animal nutrition, including proteins, flavors, colors, flours and fibers. It operates a global grain transportation network to purchase, store and transport agricultural raw materials, such as oilseeds, corn, wheat, milo, oats and barley.
In late April, the group released Q1 earnings that beat estimates. Quarterly earnings per share came in at 64 cents compared to earnings of 46 cents per share a year ago. However, revenue of $14.97 billion for the quarter ended March 2020 was less than the year-ago revenue of $15.30 billion.
The group reports revenue in three main segments:
- Ag Services & Oilseeds (delivered results that were in line with the year-ago period)
- Carbohydrate Solutions (results were lower than the first quarter of 2019)
- Nutrition (results were substantially higher YoY)
ADM is a firm that feeds the world. The group is likely to survive an economic downturn. It should also survive a second Covid-19 outbreak globally if this occurs. Its strong portfolio and global outreach with a respectable dividend yield makes ADM stock one of the best recession-proof stocks to buy.
Current Price: $140.90
52-week Price Range: $100.52-$176.22
Current Dividend Yield: 2.45%
Diageo, the global spirits maker and brewer, has diverse global exposure and brand portfolio. Such geographic diversification — especially into emerging economies, where consumers are increasingly showing brand loyalty — is likely to provide a relatively defensive investment opportunity for a retirement portfolio.
The company has over 200 strong brands, including Baileys, Don Julio, Guinness, Johnnie Walker and Smirnoff. These well-known names contribute to increased volume growth and give Diageo pricing and competitive power.
An April trading update by the company highlighted that “[s]ocial distancing measures, including the closure of the on-trade channels, have been introduced in most of our markets.” For example, on-trade sales account for about 50% and 20% of total revenue in Europe and the U.S., respectively.
The closure of restaurants and bars has led to a decline in trade sales. At the time, China was the only main market where it was “beginning to see a very slow return of on-trade consumption, as restaurants and bars have started to gradually re-open.” On the other hand, retail alcohol sales have seen a boost during lockdowns around the world.
So far, DEO stock is down about 16% in 2020. I believe the decline in price reflects most of the bad news so far. In addition to reliable dividends, DEO stock offers investors long-term growth potential, especially as it grows in emerging markets. I’d buy the dips.
Procter & Gamble (PG)
Current Price: $118.95
52-week Price Range: $94.34-$128.09
Current Dividend Yield: 2.66%
Procter & Gamble provides branded packaged goods to consumers worldwide. Several of these well-known brands include Ariel, Bounty, Charmin, Febreze, Olay, Oral-B and Pampers.
In mid-April, the group released Q3 FY20 results. Adjusted earnings came at $1.17 per share on revenue of $17.21 billion. U.S. consumers stocked up, especially on staples and hygiene essentials.
Organic revenue, which takes out the impact of foreign currency, divestitures and acquisitions, rose 6% during the quarter. The consumer products giant reports revenue in five segments:
- Beauty (organic sales increased by 1% YoY)
- Grooming (organic sales decreased by 1% YoY)
- Health Care (organic sales increased by 9% YoY)
- Fabric & Home Care (organic sales increased by 10% YoY)
- Baby, Feminine & Family Care (organic sales increased by 7% YoY)
Management believes the Covid-19 pandemic could bring about permanent changes in consumer behavior when it comes to certain products. Chief Financial Officer Jon Moeller said, “[w]e will serve what will likely become a forever altered health hygiene and cleaning focus for consumers who use our products daily or multiple times each day.”
At the end of the quarterly report, the group cut its revenue forecast for fiscal 2020, citing headwinds from foreign currency fluctuations. However, the board hiked its dividend for the 64th consecutive year, giving a 6% increase.
Year to date, PG stock is down about 4%. Procter & Gamble is a stock with staying power, especially in times when economies may contract. Therefore, it deserves a place on your radar for recession-proof stocks to buy.
Current Price: $118.25
52-week Price Range: $102-$133.38
Current Dividend Yield: 1.83%
Walmart is the largest retailer in the world, which makes it one of the most recession-proof stocks to consider. This is especially true when you consider that each week, over 260 million customers shop at 11,500 stores in 27 countries as well as on e-commerce websites. Although Walmart has an all-American reputation, over half the stores are located outside the U.S. It is also the largest employer in Fortune 500.
Over a decade ago, Walmart became a clear beneficiary of changes in consumer spending during the Great Recession’s economic headwinds. And WMT stock has reflected this shopping shift. In January 2010, WMT shares were hovering at $50. Now, they are over $118. Put another way, if you had invested $1,000 in the company in early 2009, you would now have over $2,300. And that does not include any dividend income you’d have received.
Therefore, if the current economic contraction were to continue, then investors can potentially expect consumers to minimize expenses by shopping at discount retailers such as Walmart.
In mid-May, Walmart released robust Q1 FY21 results. Quarterly earnings came at $1.18 per share on revenue of $134.62 billion. The group has kept its doors open for business throughout the coronavirus outbreak. E-commerce sales in the U.S. grew by 74% and its same-store sales jumped by 10% in the first quarter as shoppers stocked up due to the lockdown.
Investors were also pleased to see that during the quarter group’s operating expenses as a percentage of revenue fell significantly. Operating expenses accounted for 20.3% of Walmart’s revenue last quarter, versus 20.9% a year ago.
The group is expected to release earnings next on Aug. 18. WMT stock is flat YTD. I regard it as a stable company for conservative income and total return investors. If you are looking for recession-proof stocks to buy, you may want to consider the retailing giant.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.