Defensive stocks are securities that reliably perform well in good times and bad. They tend to be the stocks of established, market-leading, blue-chip companies that pay out consistent dividends and post stable earnings regardless of the state of the economy or stock market. Their products tend to be necessary rather than discretionary in nature, and they have pricing power when needed, which means they can raise their prices without losing customers. Defensive stocks tend to fall less and rise more as markets ebb and flow. So with many economists forecasting a recession in the U.S. during 2023, defensive stocks are likely to become more important to investors’ portfolios. Here are our three top defensive stock picks for 2023.
| DG | Dollar General | $250 |
| PEP | PepsiCo | $180 |
| COST | Costco | $460 |
Dollar General (DG)
As 2022 draws to a close, the share price of Dollar General (NYSE:DG) is up 4% on the year at $250 That might seem like a small gain, but it trounces the 19% decline posted by the benchmark S&P 500 index.
DG, which owns a chain of retail stores, sells products for $5 or less, with many items selling for only $1. As might be expected, Dollar General’s business has picked up with inflation running at a 40-year high in the U.S. and with the prices of many consumer products increasing to unaffordable levels.
Dollar General has performed strongly throughout 2022, announcing that its net sales rose 11% last quarter to $9.5 billion. The Tennessee-based company also continues to expand, having added 734 new retail outlets and bringing its total store count to 18,818.
With many economists forecasting a recession for America in 2023, Dollar General, in light of its status as one of the top defensive stocks of 2023, is likely to continue performing well in the months ahead. Its price-earnings ratio of 23 is decent, and DG stock pays a quarterly dividend of 55 cents, which is helpful to shareholders.
PepsiCo (PEP)
Some people might put Coca-Cola (NYSE:KO) on this list. But we give the nod to Coke’s archrival, PepsiCo (NASDAQ:PEP). What distinguishes PepsiCo from Coca-Cola is that New York-based Pepsi sells food products in addition to beverages. Its popular food brands, such as Quaker Oatmeal, Ruffles potato chips, and Rold Gold pretzels, help to widen the competitive moat around PepsiCo, which also sells a signature line of beverages that includes Pepsi, Mountain Dew, and Gatorade.
Consumers remain loyal to PepsiCo’s products and will continue to buy them even if we enter a recession in 2023. This gives PepsiCo strong pricing power, a characteristic that has been reflected in the performance of its stock throughout 2022.
Over the past 12 months, PEP stock has gained 5% and now trades at $180 a share. Even with the gain, the stock still trades at a fair price-earnings ratio of 25. And the stock pays a strong dividend that yields 2.55%.
Costco (COST)
Few companies’ customer base is as loyal as that of Costco’s (NASDAQ:COST) . Additionally, few have greater pricing power than the retail giant.
In September, Costco reported that 92.6% of its customers in the U.S. and Canada had renewed their membership, agreeing to pay at least $60 a year for the privilege of shopping at the company’s retail outlets. That represented an all-time high renewal rate for the company in the U.S. and Canada.
Globally, 90.4% of customers renewed their Costco memberships. That huge renewal rate is the envy of the retail sector and shows the fervent loyalty consumers have to Costco.
As consumer prices remain elevated and consumers’ wallets are squeezed, it is likely that they will rely even more on Costco, which marks up its products less than the average of grocery retailers. Costco has also greatly benefited in 2022from selling gasoline to motorists at cheaper prices than they can find at other gas stations.
The sharp decline of gasoline prices this past autumn caused Costco’s third-quarter results to come in slightly below analysts’ average estimates But don’t be fooled; Costco is built to help consumers survive an economic recession.
Over the last year, COST stock has declined 17% to $460 a share, pulling its price-earnings ratio down to 35. Investors should take advantage of the decline by buying the dip.
The stock pays a quarterly dividend of 90 cents a share, though the company has been known to also pay out special one-time dividends to further reward shareholders.
On the date of publication, Joel Baglole did not have (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.
