3 stocks to buy in a recession

It just seems that all stocks have trended lower this year. Yet there are stocks that always seem to do well when there’s a recession – or even the threat of a recession.

dollar tree (LTRD 0.52%), Johnson & Johnson (JNJ -1.43%)and Flowers Food (FLO -3.33%) thrived during the last recession, from December 2007 to June 2009, and all three are doing well so far this year. This is because they all have a common thread; they provide something that people need, regardless of the economy.

Dollar Tree helps people stretch their money by selling various items at low prices. Flowers Foods is benefiting because the same trends that drove people to cook at home during the pandemic are continuing – meaning people are seeing they can save money buying Flowers’ products and while eating at home. Johnson & Johnson is a huge healthcare company, and people always need its products, even during tough times.

Image source: Getty Images.

1. Dollar Tree: Money in the Bank

Chances are you’ve shopped at one of Dollar Tree’s discount variety stores or know someone who has. It operates 15,500 stores in the United States and Canada under the Dollar Tree and Family Dollar brands.

During the last recession, the S&P500 the index fell 25.1%; Dollar Tree saw its shares rise 46.9%. Although we’re not officially in a recession, the market downturn has sent the S&P 500 down 12.8% this year, while Dollar Tree is up 17.4%.

DLTR Chart

DLTR data by YCharts.

The company released its Q1 2022 numbers last week, and they were eye-opening. Revenue rose 6.5% to $6.9 billion and diluted earnings per share (EPS) rose 48.1% to a record $2.37 in the first quarter.

Dollar Tree increased its gross profit margin by 360 basis points to 33.9% in times of inflation by raising its typical price by $1 to $1.25. It also tightened its supply chain and opened 112 new stores in the quarter while expanding or relocating 33 others and closing 30 stores.

In March, the company said it expected annual EPS of between $7.60 and $8. then in the first quarter report, it increased that estimate to between $7.80 and $8.20. It also bumped expected revenue between $27.8 billion and $28.1 billion, from $27.2 billion to $27.9 billion.

Johnson & Johnson: Too big to fail

Johnson & Johnson is a favorite of value investors because it has increased revenue for six consecutive years and EPS for four consecutive years and increased its dividend for 60 consecutive years, making it a Dividend King. It’s a huge company with more than 144,000 employees, and despite lawsuits related to talcum powder and opioids in recent years, it’s still moving forward.

The company’s most recent dividend increase was 6.6% to $1.13 per quarter, giving it a 2.5% yield. Its cash dividend payout ratio is easily sustainable at 56.6%, especially given its strong cash flow.

Stocks are up more than 5% so far this year, and that should come as no surprise. During the 2007-2009 recession, its shares fell 16.2%, but that was still better than the 37.9% drop in the S&P 500. And the stock rebounded quickly from both that recession and from the short period of decline at the start of the pandemic. .

The Company operates in three segments: consumer healthcare, pharmaceuticals and medical technologies. The first segment is the only one of the three that did not see a revenue gain in the first quarter, and the company plans to split this segment by November 2023.

In the first quarter, Johnson & Johnson reported revenue of $23.4 billion, up 5% year-over-year. EPS was down 16.8% from the same period in 2021, but gross profit came in at $15.8 billion, up 3.7%. The company said it expects annual EPS of between $10.60 and $10.80, posting a gain of between 8.2% and 10.2%, and annual revenue of between 94.8 and 95.8 billion dollars, for a gain of between 3.8% and 4.8% compared to last year.

Flowers Foods manages to rise to the occasion

Flowers Foods is another company that should be familiar if only because of its baked goods brands, which include Tastykake and bread brands Wonder, Nature’s Own and Sunbeam, among others.

As a staple consumer goods company, Flowers Foods is as stable as it gets. So far this year, its stock is down less than 1%. During the 2007-2009 recession, its shares lost only about 6%. There’s a reason his stock isn’t making big dives; when times are tough, people still have to eat, and its baked goods and breads are a big part of our diet.

Flowers has something that sets it apart from many companies: a dividend that has increased for 20 consecutive years. The company increased its quarterly dividend this year by 4.8% to $0.22, giving it a yield of 3.22%, more than twice the average S&P 500 dividend yield of 1.37%. The payout is a bit high at 82%, based on trailing 12 months earnings, but based on expected cash flow, it’s a much more reasonable 41%. The company also helps investors by regularly repurchasing stock and plans to buy back $25.4 million of its stock this year.

The company managed to cope with inflationary pressures by raising prices. In the first quarter, it posted revenue of $1.4 billion, up 10.3% year-over-year. Net income was $85.6 million, up 19.4% from the same period in 2021, and its EPS of $0.40 was up from $0.34 in the first quarter of 2021 .

Flowers also updated its 2022 annual revenue forecast to between $4.764 billion and $4.850 billion, representing a gain of between 10% and 12%. It lowered its adjusted EPS to a range of $1.20 to $1.30, from an earlier guidance of between $1.25 and $1.35, citing adjustments for inflation and on-chain issues supply.

All the right choices

These three companies have proven to be solid choices during a recession and have advantages that others may not have during a downturn. Dollar Tree and Flowers Foods are designed to thrive during recessions because they are the type of businesses people turn to to save on necessary daily items. Johnson & Johnson does not profit from recessions per se, but its enormous size and its health articles, whether pharmaceuticals or medical technology devices such as knee prostheses or lenses for surgery of cataract, are the types of products that are not really optional.

Flowers Foods and Johnson & Johnson have an advantage over Dollar Tree in that both companies offer above-average dividends with a history of increases. This gives long-term investors some peace of mind to wait out recessions, knowing that equities offer strong total returns. The three companies have similar price-earnings ratios ranging from a high of 26 for Flowers Foods to 25 for Dollar Tree and 24 for Johnson & Johnson.

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