In an attempt to put a lid on inflation, the Federal Reserve has stated that it intends to raise its benchmark federal-funds rate by 0.25% at least six more times this year after already raising rates once. The Fed could also decide to move rates 0.50% if it deems necessary to combat inflation, which has some investors thinking about recession-proof stocks.
Add to this the unknown impact of the Russian invasion of Ukraine and there is a lot of risk in markets.
While we believe investors should be aware of potential headwinds, this doesn’t imply that we are suggesting they should head for the exits. Instead, we encourage long-term investors to seek out recession-proof stocks in order to protect their portfolio.
We also believe that a special emphasis should be placed on owning those companies with long track records of dividend growth as the income they provide can cover costs in retirement, be used to purchase new shares at what could be lower prices, and help to offset any weakness in the share price.
Three of our favorite recession-proof stocks include:
ABM Industries (ABM)
Our first company on the list of recession-proof stocks to consider is ABM Industries, a leading name in facility solutions. The company is valued at $3 billion and generated revenue of just over $6 billion in fiscal year 2021.
Since its founding in 1909, ABM Industries has become one of top providers of facility solutions. Among their offerings include janitorial, energy solutions, facilities engineering, HVAC, parking, and electrical and lighting services.
The variety of service offerings is appealing to a wide variety of customers and used in many kinds of facilities, including airports, data centers, hospitals, industrial complexes, public schools and universities. This provides ABM Industries some diversification both among service offerings, but also among clients.
ABM Industries has used acquisitions to expand its reach. For example, the company acquired GBM Support Services Group Limited, a top name in building maintenance, waste and facilities and management services in the U.K., in 2014. ABM Industries followed that deal with its purchase of Westway Services Holdings, a leading technical engineering systems service provider also located in the U.K., in 2015. Both acquisitions bolstered ABM Industries’ a presence in the region.
More recently, the company completed its purchase of Able Services, the largest family-owned facility services company in the U.S., late last year. This was one of the largest acquisitions in ABM Industries’ history, showing that the company remains aggressive in purchasing growth to augment its core business.
ABM Industries’ business model is quite strong and the needs for services remains robust even in recessionary environments. Earnings-per-share grew a total of more than 34% from 2007 to 2009, with each year showing a higher result.
As a result of a strong business even in difficult times, ABM Industries has amassed a very impressive dividend growth streak of 54 years. The lengthy growth streak qualifies the company as a Dividend King, of which there are just 40 other names that have the required five decades of dividend growth for membership.
With an expected payout ratio of just 23% for 2022, ABM Industries is well positioned to continue to grow its dividend in the coming years. The stock yields 1.7%, above the 1.3% average yield for the S&P 500 index.
Bristol-Myers, one of the top names in healthcare, is next for recession-proof stocks. The company is valued at $158 billion and generated revenue of $46 billion last year.
Bristol-Myers has a very large portfolio of brands that have helped make the company into one of the largest healthcare companies in the world. Eliquis, which is used to prevent blood clots, is one of the company’s top grossing products and is showing high growth rates. Eliquis grew close to 20% in the most recent quarter. Opdivo, which is used to treat advanced renal carcinoma among other cancers, was up 11% as demand in the U.S. has accelerated.
Like ABM Industries, Bristol-Myers hasn’t been shy about making large acquisitions to improve its business. The best example of the is the company’s $74 billion purchase of Celgene in late 2019. This purchase added Revlimid, treatment for myeloma and certain anemias, into the fold, but also added additional blood cancer medicines.
Healthcare is typically a more recession-proof sector as people seek out treatment for aliments to improve quality of life. This was the case for Bristol-Myers during the last recession as earnings-per-share grew 151% from 2007 to 2009. The company also posted gains each year for the period.
Bristol-Myers has raised its dividend for 15 consecutive years. Dividend raises were very minimal for much of this growth streak, often just a penny per share per quarter. However, dividend growth has greatly accelerated recently as the last three increases have been in the high single-digit range.
Higher than usual dividend increases could potentially become the norm for shareholders as Bristol-Myers has an expected payout ratio of just 28% for the year. Shares of the company yield 2.9%, more than twice that of the market index.
Last on today’s list of recession-proof stocks to consider is UGI, a gas and electric utility company. The $7.6 billion company has annual revenue of $7.5 billion.
UGI distributes natural gas and electricity to more than 670,000 customers in Pennsylvania, but the company is much more than a regulated utility. UGI operates a large energy distribution business. Through its subsidiaries, the company transports and markets energy and energy related services.
Among its segments are AmeriGas Propane, the largest propane company in the U.S., and Midstream & Marketing, which sells natural gas, renewable energy, liquid fuels and electricity to close to 14,000 residential, commercial and industrial customers in 12 U.S. states and the District of Columbia. UGI also has substantial European operations. The company provides liquid petroleum gas to customers in 17 countries on the continent, including the U.K, France, and the Netherlands.
In total, UGI has six business segments, with the largest contribution a little more than a third of annual net income. This makes the company not as reliant on any one segment, something many utility companies do not share. Most utility companies do not have business operations that expand beyond the U.S. either. This diversification and foot print helps protect UGI in case of challenges in any one area.
The utility sector often performs better during recessions that most other sectors as customers usually prioritize sources of energy even in economic downturns. UGI is an excellent example of this as earnings-per-share improved 33% from 2007 to 2009 as the company saw its bottom-line grow each year of the period.
This unique business model and the ability to withstand harsh downturns has enabled UGI to grow its dividend for 34 consecutive years. The expected payout ratio for 2022 is 45%, a very low figure for a company in the utility sector. The company has maintained a payout ratio around 50% for most of the last decade, demonstrating how successful UGI has been at growing both its dividend and earnings-per-share during the period. UGI yields 3.8%, almost three times that average yield for the S&P 500 Index.
There are numerous headwinds that markets are dealing with at the moment, none of which appears to be dissipating in the near term. This could cause investors anxiety, but, instead of moving to cash, we encourage investors to consider owning stocks of companies that successfully navigated the last recession.
ABM Industries, Bristol-Myers and UGI are three examples of companies that saw earnings-per-share grow by high rates during the 2007 to 2009 period. All three companies have extensive dividend growth track records and each stock yields higher than what the S&P 500 is paying. This suggests that these stocks could be excellent investments for investors worried about the possibility of a recession in the near future.
On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.