In one previous post, we discussed the growing risk of an impending recession, a risk that is exacerbated by stretched asset valuations, the Ukraine crisis and the ongoing Covid-19 pandemic. We have highlighted the flattening of the yield curve, runaway inflation and a slowing housing market as some of the bearish indicators investors should watch.
Here we list several defensive stocks that are likely to weather a recession with minimal capital erosion. These recession-proof stocks tend to provide stable earnings and dividends regardless of the state of the overall stock market, and also tend to outperform in bear markets.
Defensive stocks come with a caveat, however: they tend to lag cyclical stocks during strong bull markets. It is therefore prudent to balance your portfolio by having a healthy mix of both baskets.
Giant discounter Walmart Inc. (NYSE: WMT) has often thrived during economic downturns. CFRA Research analyst says investors don’t fully appreciate the breadth and depth of Walmart’s investments in omnichannel retailing initiatives, alternative profit streams, supply chain improvements and expansion of the product range.
For example, Walmart is expected to invest $16-17 billion in capital expenditures in 2022, with these e-commerce, Technology, and investments in automation that are likely to pay off for long-term investors. With inflation levels at 40-year highs, shoppers are likely to become more price-conscious this year and increasingly turn to discount retailers such as Walmart.
Costco Wholesale Corp. (NASDAQ:COST) is a leading warehouse retailer whose business model makes it one of the best retail inventory own for the long term. Costco has approximately 112 million members, of which 62 million are executive members.
Last year, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) Vice Chairman Charlie Munger told investors that Costco held a specific advantage over Amazon Inc. (NASDAQ:AMZN) when it comes to growing your business.
“Costco, I think, has one thing that Amazon doesn’t. People really trust Costco to deliver tremendous values. This is why Costco poses a certain danger to Amazon – because they have a better reputation for providing value than virtually anyone, including Amazon.“, Munger said.
Costco is relentless when it comes to getting the best possible prices from its suppliers, not to make more money, but rather to get the best possible prices for its customers. This results in a high trust score with its members and allows it to derive most of its profits from the annual dues of its satisfied members.
#3. Lockheed Martin
Lockheed Martin (NYSE: LMT) is a leading defense contractor that produces high-tech weapons and defense systems. LMT also provides a wide variety of services to governments around the world.
Government budgets and defense spending tend to be much less volatile than other parts of the economy. And the general trend is upward: according to the Deloitte Research Center for Energy & Industrials, defense spending, worldwide, is expected to increase at an average annual rate of around 3% until 2023 to reach 2.1 trillion. of dollars.
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LMT has a healthy balance sheet and a long history of paying and increasing dividends. As an example, Lockheed Martin increased its quarterly dividend by 7.7% at the end of 2021 to $2.80 per share, the current yield of 2.9% being well above the S&P500yield of 1.4%.
Additionally, the company has moved into higher-growth, higher-margin segments, such as cybersecurity and IT services.s. The defensive qualities of LMT are clearly evident in the current market downturn: LMT stocks have returned 23.4% year-to-date versus -3.4% for the S&P 500.
#4. Northrop Grumman
Another giant defense contractor, Northrop Grumman Corp.(NYSE:NOC) is another top defensive stock. Over the past five years, NOC has grown revenue to 8.5% CAGR, earnings to 20.3%, free cash flow to 8.8%, and dividends to 11.8%. Indeed, defense spending continues to grow globally and NOC is one of the leading stocks in the sector.
In addition to its relative stability as a defense stock, NOC offers additional avenues for growth through its exposure to the space industry. Northrop’s customers include NASA and telecommunications companies, as it provides services related to space logistics, satellite launches and maintenance, space security and propulsion systems. Overall, space industry revenue is expected to reach $1 trillion by 2040, up from $350 billion currently, according to Morgan Stanley.
#5. The Utilities Select Sector ETF
the Utilities Select Sector SPDR ETF (NYSEARCA:XLU) is an exchange-traded fund that invests in shares of companies operating in the utility sectors.
For decades, utility stocks have been considered an indispensable part of an income investor’s portfolio, largely due to their defensive qualities. First, utilities tend to be more resilient to economic cycles than most other sectors of the economy because the demand for utilities tends to be stable. Utility stocks – such as electric, gas and water companies – can help stabilize a portfolio by reducing volatility and risk, thanks to the fact that the sector is heavily regulated. Indeed, most utilities have predictable cash flows, allowing many to pay decent dividends with higher yields than other fixed income investments.
XLU has $14.8 billion in assets under management (AUM) and a dividend yield of 2.72%. Its five main holdings are:
- NextEra Energy Inc. (NYSE:NEE)
- duke energy (NYSE: DUKE)
- South Co (NYSE: N/A)
Dominion Energy (NYSE:D)
Sempra Energy (NYSE: SRA)
By Alex Kimani for Safehaven.com
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