Some businesses actually perform quite well when a recession strikes.
As we learned last week, coronavirus disease 2019 (COVID-19) isn’t a foreign problem. It’s an illness that pays no heed to borders, and it’s currently spreading throughout the United States.
This lung-focused novel coronavirus has been confirmed in more than 142,000 people worldwide, as of March 14, leading to nearly 5,400 deaths, according to the World Health Organization. But, more important, while new cases have slowed to a crawl in China, where COVID-19 appears to have originated, the number of confirmed cases around the globe is expanding rapidly (more than 9,700 new cases outside of China on March 14 alone). This pandemic has caused countries to enact mitigation measures that even a few weeks ago would never have been fathomable.
While efforts to limit large social gatherings are a smart move to keep healthcare systems within the U.S. from becoming inundated, it also means a serious disruption to supply chains and the financial livelihood of some industries and sectors. In other words, it’s becoming increasingly likely that coronavirus is going to tip the U.S. and/or global economy into a recession.
During recessions, it’s not uncommon to see the unemployment rate rise, for the prices of goods and services to fall, or for the stock market to remind investors that it can, indeed, decline. But bailing on high-quality stocks during a recession is rarely a smart move. Here are seven of the most recession-resistant stocks you can consider buying right now.
1. Johnson & Johnson
I’ve said it before, and I’ll say it again: You don’t get to choose when you get sick or what ailments you develop, which is what makes healthcare conglomerate Johnson & Johnson (NYSE:JNJ) a relatively surefire investment in any economic environment.
Johnson & Johnson has three operating segments, each of which perfectly balances out this consistently growing company. Pharmaceuticals, for instance, provide the bulk of J&J’s margins, but patent exclusivity on branded drugs is finite. Meanwhile, medical devices and consumer healthcare products are slower growing segments, but they respectively offer a longer-term growth opportunity, substantive pricing power, and cash flow predictability.
Here are two additional mind-blowing stats about Johnson & Johnson: It’s increased its adjusted operating income for 36 consecutive years, and will likely raise its dividend next month for the 58th straight year. It’s as recession-resistant a company as they come.
The days of rapid growth from telecom companies is long gone. But boring businesses like AT&T (NYSE:T) make for great investments when recessions strike.
Most of AT&T’s profit is generated from it wireless segment. During economic contractions, subscription-based businesses are less likely to see churn rates rise significantly, which is a good thing since AT&T’s wireless customers are predominantly on subscribed plans. Further, smartphones have practically become a necessary good for most folks.
AT&T is also in the midst of rolling out faster network speeds via its 5G launch at a time when telecommuting and social distancing is picking up. This, combined with its efforts to reach more consumers via streaming, which includes HBO Max, will allow AT&T to generate highly predictable cash flow and deliver a superior dividend yield.
3. Innovative Industrial Properties
Although the cannabis industry isn’t recession-proof, marijuana real estate investment trust (REIT) Innovative Industrial Properties (NYSE:IIPR) is about as recession-resistant as it gets.
The beauty of the cannabis REIT model is that it’s low-cost and generally very transparent. Innovative Industrial Properties acquires medical marijuana growing assets and processing sites, then leases them out for long periods of time (generally 10 to 20 years). In addition to pocketing rental income, IIP is able to pass along modest annual rental increases to stay ahead of inflation.
As of March 11, IIP owned 53 properties in 15 states with a weighted-average remaining lease length of 15.9 years and an average return on invested capital of 13.2%. Put simply, it’ll have a complete payback on its $779.6 million in capital in a little over five years, with everything else being gravy. No wonder it’s yielding more than 5% to shareholders at the moment.
4. Sirius XM
One of the biggest themes of this list is cash flow consistency, and satellite operator Sirius XM (NASDAQ:SIRI) does offer that.
Even though the auto industry was on a cyclical downswing long before coronavirus became a global pandemic, Sirius XM wasn’t any worse for the wear. The reason being that it’s mostly reliant on subscription revenue, which as noted isn’t typically affected all that much during short recessions. Last year, Sirius XM added roughly 1.1 million self-pay subscribers, pushing its total to 30 million, with subscriber revenue accounting for close to 79% of the company’s $7.79 billion in annual sales.
Furthermore, the company’s costs to operate its satellite network tend to be relatively constant from one year to the next (not accounting for talent costs and royalties). This, too, adds to the cash flow transparency that makes Sirius XM a highly recession-resistant company.
As crazy as it might sound, a company that leans on consumer spending can actually be an excellent place to park your money during a recession.
Payment processing facilitator Visa (NYSE:V) is the dominant force in the U.S. marketplace, with approximately 53% market share by network purchase volume. Even when the Great Recession struck, Visa managed to expand its U.S. market share and saw only a modest one-year dip in network purchase volume. Consumers will continue to spend, even during recessions, and may even be more prone to reach for plastic as opposed to cash.
What’s more, Visa isn’t a lender like some of its peers. Though this can, in theory, limit its earning potential during economic booms, not being a lender protects Visa from credit delinquencies when recessions strike.
6. NextEra Energy
Next to healthcare, utilities like NextEra Energy (NYSE:NEE) are perhaps the safest way to ride out a recession. That’s because consumers rarely base their electricity, gas, or water consumption habits on the state of the U.S. economy.
NextEra is an especially intriguing case because it’s the top provider of green energy in the country. No utility in the U.S. generates more electric power from solar or wind than NextEra, and it’ll likely remain that way for the foreseeable future. With interest rates pushing toward historic lows, NextEra will have little trouble borrowing cheaply to make long-term investments in clean, low-cost energy production.
There’s also the fact that NextEra’s non-renewable generating operations are regulated. You might think needing to ask an energy commission for permission to raise electricity rates is a bad thing, but it actually keeps NextEra from being exposed to potentially wild fluctuations in wholesale pricing.
7. Procter & Gamble
Lastly, if we’ve learned anything about the panic-buying we’ve witnessed in recent days, it’s that no matter the condition of the economy, everyone needs basic goods like toilet paper, detergent, and toothpaste, to name a few items. That makes a company like Procter & Gamble (NYSE:PG) a highly recession-resistant stock.
One of the reasons Procter & Gamble is such a successful company is its ability to pass along modest annual price increases on these basic-need goods. In the December-ended quarter, more than half of the company’s growth was derived from increased consumer purchases. However, it also netted 1% organic growth just from price hikes, and another 1% from product mix. Simply pushing higher-margin, basic-need goods has been a winning formula for P&G for a long time.
Procter & Gamble may also have the most impressive dividend streak of any publicly traded company. It’s raised its payout for 63 straight years, and will likely make it 64 next month. This is a stock you can count on if a recession occurs.
Author: Sean Williams
Source: Fool: 7 of the Most Recession-Resistant Stocks to Buy Now