As several experts are expecting a global recession within the next 12-months, we take a look at three stocks that can survive a downturn.
Economic cycles are inevitable. So, it’s impossible for equity investors to be insulated from a recession. The last decade witnessed a period of elongated economic expansion allowing investors to create massive wealth during the bull run. For example, an investment of $10,000 in the S&P 500 index at the start of 2010 would be worth close to $54,000 at the end of 2021.
However, economic expansion is soon followed by a period of contraction, also known as a recession, where equity markets are highly volatile.
The first seven months of 2022 have been harrowing for investors as market experts forecast a recession to impact global economies within the next 12 months. While stocks across many industries have seen a significant plunge in their valuations, a few companies are recession-resistant.
Here, we look at three recession-resistant retail stocks investors can buy in 2022.
Among the most recognizable brands in the world, Pepsi (NASDAQ: PEP) is valued at $235 billion by market cap. The consumer beverage giant has returned 224% to investors in dividend-adjusted returns since July 2012.
Despite its colossal size, Pepsi’s sales rose by 5.2% year-over-year in Q2 of 2022. If we exclude foreign exchange fluctuations, revenue growth would be higher at 8%, compared to the prior-year period. Its adjusted earnings surged by 10% to $1.86 per share in Q2, and analysts expect earnings to rise by 7.5% annually in the next five years. Pepsi also offers a forward yield of 2.7% making it attractive to income-seeking investors.
Pepsi is a Dividend King, suggesting it has increased dividends for 50 consecutive years. Its payout ratio stands at 66.8%, which is quite sustainable while providing enough room to lower debt and invest in capital expenditures.
Procter & Gamble
Another recession-resistant stock is Procter & Gamble (NYSE: PG) , valued at $350 billion by market cap. In fiscal Q3 of 2022 (ended in March), Procter & Gamble reported revenue of $19.4 billion, an increase of 7% year-over-year. Analysts forecast the company to report revenue of $18.7 billion in the quarter.
Procter & Gamble has a comprehensive portfolio of consumer-facing brands allowing it to increase prices by 5% on an average across categories in Q3. Its solid financials have enabled Procter & Gamble to increase dividends yearly for 66 consecutive years. The stock currently offers investors a forward yield of 2.5%.
Procter & Gamble has a payout ratio of 62% and a debt to EBITDA multiple of 1.5x, which is pretty conservative.
The final recession-resistant stock on my list is Costco (NASDAQ: COST), a retail giant valued at $215 billion by market cap. Costco thrived amid the pandemic as customers stocked up on essential items. In fiscal Q3 (ended on May 8), Costco’s sales rose 16% year-over-year to $51 billion, while adjusted earnings surged to $3.05 per share, up from $2.75 in the year-ago period.
In its monthly update, Costco confirmed June sales remained elevated, rising 20% compared to the same period in 2021.
Costco is a big-box retailer that enjoys significant loyalty from its vast base of customers. At the end of fiscal Q3, its loyalty program had more than 64 million paid members, compared to 47.6 million members at the end of 2016.
Costco’s gross margins are among the lowest among peers, but its enormous volume allows the company to keep product prices down.