With both the Dow Jones Industrial Average and the S&P 500 flirting with their respective all-time highs, it might seem like an odd time to start contemplating which stocks one might want to add to his or her portfolio to weather a recession. Of course, this senescent bull market has been plagued by the ongoing trade war between the United States and China, which has introduced a heavy dose of uncertainty into the market. Indeed, after observing how negatively President Donald Trump's trade war tweets have affected the markets, Bank of America Merrill Lynch cautions investors to "tread cautiously."
Similarly, J.P. Morgan, with its tongue firmly lodged in its cheek, has created the "Volfefe Index" to show how those same trade war tweets have a similarly strong impact on the bond market. So, while the bulls may be charging at the moment, the bearish among us suspect we may be a tweet or two away from watching the market's matador pull his estoc from behind the muleta and put an end to this historic run.
Accordingly, some investors may well be looking for a few recession-resistant stocks to keep their portfolios afloat. In this article, I take a look at a few stocks in different industries that tend to perform respectably - or even thrive - in a recession. As a dividend growth investor, I only consider stocks that pay dividends and have a reasonably high chance of increasing those payouts even in adverse market conditions. To this end, I have highlighted five stocks that I believe will perform well during a recession and will pay shareholders while doing so.
Unlike many industries that struggled to forge a path towards profitability during the Great Recession, movie theaters performed astonishingly well. Taking a look at the normalized diluted earnings per share for Cinemark (CNK), we can see that the company fared fairly well during an era characterized by low consumer discretionary spending:
Thus, while Cinemark and rival AMC (AMC) have been lackluster investments in recent years, they may prove to be worthwhile additions to a portfolio during a prolonged market downturn. As an income-oriented investor, I am particularly interested in a company's dividend, which can be a rare bright spot in an otherwise bleak market, provided it isn't cut. Though it has only raised its dividend for four consecutive years, Cinemark has never reduced its payout to shareholders since it began paying dividends in 2008:
Notably, Cinemark initiated its dividend during the Great Recession, which appears to support the notion that the film industry can generate significant cash during market downturns. With a ten-year compound annual growth rate of 5.92% and a robust 3.67% yield, Cinemark is a compelling investment opportunity for those investors spooked by the prospect of a prolonged recessionary environment.
Putting On A Happy Face
If the so-called "lipstick indicator" is to be trusted, investing in cosmetics might be an option for the bears who believe we are approaching another recession. Essentially, the lipstick indicator gains its strength from the notion that consumers will forego larger purchases such as expensive clothing while indulging in less costly treats such as lipstick when they worry about their finances. Indeed, Euromonitor International's research reveals that cosmetics such as mascara and nail polish were high growth industries during the most recent recession:
Source: Euromonitor International (Passport Industries)
While its current share price of $4.59 is knocking on the door of penny stock territory and has been the subject of acquisition speculation for some time, Avon Products (AVP) actually enjoyed sustained growth during the Great Recession and even approached an all-time high price in September of 2008. Between December 2007 and June 2009, Avon, the world's fifth-largest beauty company and the second-largest direct selling outfit, managed to increase its cash from operations and enjoy a concurrent growth trajectory in its normalized diluted earnings per share at a time when discretionary spending was at a nadir:
While Avon has fallen on hard times, the company's ability to generate income and grow its share price during the brutal bear market at the conclusion of the last decade stands as a testament to the appeal of cosmetics during economic contraction. For investors seeing an incipient bear market in today's financial volatility, it may be worth considering companies such as Estée Lauder (EL). It offers the sort of recession-resistant consumer indulgences that buoyed Avon during the last bear market while also providing a significantly stronger bottom line.
With market-leading name recognition and a stable of popular brands including the eponymous Estée Lauder, Clinique, Origins, M·A·C, Aveda, and La Mer, among others, Estée Lauder is well-positioned to keep many portfolios afloat during another recession. The company's revenues are approaching $15 billion while its share price, normalized diluted earnings per share, and cash from operations have steadily risen:
Moreover, Estée Lauder offers a solid, if modest, dividend that is growing steadily while keeping the payout ratio at a very reasonable level:
For these reasons, Estée Lauder should land on the short list of anyone looking to remain invested in stocks during the next recession.
A Different Sort Of Liquidity
In the Euromonitor International chart above, Single Malt Scotch Whisky stands alongside cosmetics as a rare high growth investment during the last recession. Thus, it stands to reason that Diageo (DEO), the world's largest producer of whiskies, would be worth checking out. Like many companies beaten down by the global financial meltdown of 2007-2009, Diageo saw its share price lose more than half its value:
At first glance, Diageo may not seem like a particularly strong stock to hold during a recession, but that is not entirely fair. If anything, the recession provided a buying opportunity for a stock that would enjoy sustained growth in the subsequent decade:
Because it is an English company, the fluctuation in exchange rates can make Diageo look rather inconsistent in its dividend payments, but a quick glance at its historic payments reveals an upward trend:
With a current yield of 2.10% and a payout ratio of 54.49%, Diageo investors can rest assured that the producer of such iconic brands as Guinness, Johnnie Walker, Smirnoff, Tanqueray, Captain Morgan, Crown Royal, and Bailey's will continue to distill our tendency to drink when distressed into dividends through the next recession.
Replacing A Gold Rush With A Sugar Rush
One of the best known stories in the history of American investment is that of the Floridian banker Pat Munroe, who convinced his neighbors in the town of Quincy to buy up shares of Coca-Cola (KO) stock during the Great Depression when he noticed that people would spend "their very last nickels to buy a bottle of Coca-Cola." As the story goes, Quincy blossomed into a town of millionaires. At the time Munroe first began to notice how a sugary drink could bring a brief moment of pleasure to his financially desperate neighbors, several now-iconic sweet treats debuted. Snickers bars (1930), Tootsie Pops (1931), 3 Musketeers bars (1932), and Hawaiian Punch (1934) all emerged during the Great Depression, presumably to capitalize on the sense that a piece of candy or a swig of sucrose could cheer someone up even if they had practically nothing to spend.
Perhaps not surprisingly, the New York Daily News published a story at the height of the Great Recession reporting that people "turn to fatty, sugary comfort food to deal with recession-related stress." Perhaps as a result of this tendency, both The Hershey Company (HSY) and Tootsie Roll Industries (TR) traded more or less sideways for the duration of the recession:
At the same time, cash from operations for both companies declined gradually, suggesting that while consumer spending fell across the board, the purveyors of candy suffered comparatively little:
Both companies currently offer a long history of dividends with regular hikes, though Hershey's 2.05% yield is clearly more appealing than Tootsie Roll's paltry 0.96%:
While Hershey's stock seems more appealing for investors looking to capitalize on recession stress eating than Tootsie Roll, neither stock really wows me. I would actually be more inclined to pick up something like PepsiCo (PEP), which offers a wide range of salty snacks via its Frito-Lay division to complement its stable of sugary drinks as well as healthier options such as Quaker Oats. Granted, PepsiCo's stock price endured a more substantial drop than either of the two candy companies mentioned above:
However, PepsiCo recovered quickly and has enjoyed almost as much growth as Hershey, while Tootsie Roll had stumbled along at a much slower rate:
Where PepsiCo really shines, though, is in its dividend. A member of the Dividend Aristocrats, PepsiCo has a decades-long streak of regular dividend hikes that continued uninterrupted through multiple recessions and bear markets, while maintaining a relatively high yield and a reasonable payout ratio:
As a company that is built for the long haul, PepsiCo offers more than just the sweet and savory snacks with which people treat themselves when stressed or preoccupied. As a result of the continued popularity of its products, their ubiquitous presence on store shelves, and the company's global brand recognition, PepsiCo checks more than just the stress eating box; it is a blue-chip dividend machine that has the capital to survive the next recession while regularly increasing payouts to shareholders.
Finding Gems In The Bargain Basement
It doesn't take a genius to realize that people often purchase cheaper items when they have less money to spend. This is good news for Dollar General (DG), the fastest-growing retailer in the United States. Last month, when the S&P 500 declined by 2%, Dollar General stomped the market with nearly an 18% gain:
Such behavior is nothing new. While Dollar General was not yet a publicly-traded company during the Great Recession, we need only look to Dollar Tree (DLTR) stock to see how well a budget retailer can fare when the rest of the economic landscape smolders:
While both Dollar General and Dollar Tree are enjoying massive expansion, particularly in rural and low-income areas to serve what Newsweek describes as a new "permanent underclass" in America, the former has been enjoying a more rapid expansion. Moreover, of the two, only Dollar General offers a dividend:
With a very reasonable payout ratio of 21.09% and four years of consecutive dividend hikes under its belt, Dollar General appears to be on its way to establishing itself as a solid choice for dividend growth investors. By catering to under-served rural and impoverished populations, dollar stores already appeal to the individuals most likely to feel the effects of a recession and will only attract more customers if the economy tanks. As the leader in the niche, Dollar General has a bright future - particularly if that future is dark for the rest of us.
While we may not see another recession in the short term, many analysts do expect one within a comparatively short time. While I have highlighted a handful of stocks that I think will perform well during the next recession, I know there are many other stocks I should consider and I would love to read your thoughts on the subject in the comments below.
Disclosure: I am/we are long KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.