- Each of these stocks to buy are low-beta stocks with attractive dividend yields to help endure a recession.
- AstraZeneca (AZN): Strong growth visibility with a deep pipeline of drug candidates. A healthy dividend yield of 3.1%.
- Walmart (WMT): Focus on consumer spending to drive GDP growth will continue to benefit the company. Strong cash flows for dividends and share repurchase.
- AT&T (T): Mobility segment likely to create value with continued investments in 5G and fiber division. Deleveraging is another key positive catalyst.
- Lockheed Martin (LMT): Defense spending likely to remain high even in a recession. Strong order backlog provides clear cash flow visibility.
- Johnson & Johnson (JNJ): Potential spin-off of the consumer health division is a positive catalyst. Healthy cash flows and dividends.
The recent correction in equities has presented a good opportunity for investors to buy stocks at deep value. Among growth and dividend stocks, there are several stocks to buy on market over-reaction. However, investors need to consider some portfolio reshuffling with macro-economic headwinds. In my view, it makes sense to go overweight on low-beta stocks for the next few quarters.
It’s worth noting that there are various factors that have triggered a sharp correction. Inflation concerns and contractionary monetary policies seem to be among the top factors. However, there is also an increasing possibility of a recession and this has aggravated the concerns for investors.
It seems likely that the U.S. is headed for a recession in 2023. It goes without saying that other economies will be in a phase of slowdown or recession in a globally synchronized world. Cathie Wood believes that a global recession is likely.
Considering these macro-economic headwinds, I would look at some defensive stocks to buy. Ideally, these are stocks that have robust cash flows and a clear dividend visibility. Even during an economic downturn.
Let’s discuss these stocks to buy for the coming recession.
|JNJ||Johnson & Johnson||$177.56|
AstraZeneca (NASDAQ:AZN) is among the high-quality low-beta stocks to buy for the coming recession. At a forward price-to-earnings-ratio of 16.3x and a dividend yield of 3.1%, the stock offers value.
For Q1 2020, AstraZeneca reported robust revenue growth of 60% to $11.4 billion. The company has also reiterated the guidance for high teens percentage revenue growth for 2022. It’s also worth noting that the company has a pipeline of 183 drugs in various phases to trials. Considering the pipeline, AstraZeneca expects to deliver “durable growth” through 2025.
Also, for Q1 2022, the company reported operating cash flow of $3.2 billion. With robust cash flow visibility, there is ample flexibility to invest in research and potentially increase dividends.
This makes AZN stock attractive considering the fact that the stock is higher by just 13% over a 12-month period. A break-out on the upside seems likely.
In particular, with the company guiding for core EPS growth of around 25%. A price-earnings-to-growth ratio of lower than one indicates that AZN stock is undervalued.
In a recession scenario, the policymakers will be focused on boosting consumption spending. With retail sales being a key part of consumption expenditure, it makes sense to consider Walmart (NYSE:WMT) among the stocks to buy. Of course, WMT stock has a low-beta and offers a dividend yield of 1.5%.
For financial year 2022, Walmart reported revenue growth of 2.4% on a year-over-year basis. While top-line growth is unlikely to accelerate significantly, there are two points to note.
First, Walmart reported $24.2 billion in operating cash flows. There is ample financial flexibility for dividends, share repurchase and aggressive investments in emerging markets.
Further, the company reported $5 billion in membership and other income. As membership income swells, it’s likely to support cash flow upside.
It’s also worth noting that Walmart’s e-commerce sales have increased by 1% and 70% on a two-year stack. As the company builds strong omni-channel sales presence, the outlook is positive.
Overall, WMT stock has been almost sideways in the last 12-months. This is a good accumulation opportunity amid macro-economic uncertainties.
With the spin-off of the media division completed, AT&T (NYSE:T) stock looks attractive at a forward P/E of less than 10x. The low-beta stock is in a mode of consolidation and a break-out on the upside is imminent.
For Q1 2022, AT&T reported operating revenue of $38.1 billion for the communications business. For the same period, the adjusted EBITDA was $11.6 billion. With visibility for strong cash flows, AT&T is positioned to sustain dividends and deleverage.
Another key positive for the communications division is sustained growth in post-paid phone subscribers and AT&T fiber subscribers. The company has made significant investments in the last few years in 5G and fiber. This is likely to help in sustaining growth.
In terms of deleveraging, AT&T plans to reduce net-debt-to-adjusted-EBITDA to 2.3x by the end of 2023. This seems entirely likely with positive cash flows and cash inflow after the spin-off.
Lockheed Martin (LMT)
With escalation in geo-political tensions coupled with higher recession probability, Lockheed Martin (NYSE:LMT) is among the top stocks to buy. Global military spending has already surpassed $2 trillion for the first time.
With Lockheed being a major supplier for the U.S. government and NATO allies, the company is positioned to benefit. With most European countries short of the defense spending target, the outlook is positive.
As of March 2022, Lockheed reported an order backlog of $134 billion. This provides clear cash flow visibility. Further, it’s likely that the backlog will swell in the coming quarters.
In terms of cash flows, Lockheed Martin has guided for operating and free cash flow of $7.9 billion and $6 billion, respectively, for 2022. Given the backlog, cash flows are likely to remain steady in the coming years.
This is important with LMT stock offering an annualized dividend of $11.2. The current dividend yield of 2.57% is attractive and sustainable.
Overall, defense spending is unlikely to decline, even in a recession scenario. This makes LMT stock worth holding in the portfolio.
Johnson & Johnson (JNJ)
Johnson & Johnson (NYSE:JNJ) is a diversified play in the consumer health, pharmaceutical and medical devices segment. JNJ stock has been sideways for the last 12-months, but offers an attractive dividend yield of 2.56%.
Besides being a defensive stock, I also believe that JNJ stock is positioned to break-out on the upside. Recently, the company appointed a CEO and CFO for the consumer division spin-off. This is likely to create value with a focused healthcare company and a separate consumer business.
Of course, the spin-off is not happening immediately. However, the plans are likely to ensure that the downside in JNJ stock is capped. On the other hand, the upside potential seems meaningful at current valuations.
For Q1 2022, the company reported sales of $23.4 billion, which was higher by 5% on a year-over-year basis. Sales growth was driven by the pharmaceutical and medical devices segment. The consumer segment reported marginal sales de-growth. The potential spin-off of the struggling division seems like a good decision.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.