The U.S. economy could enter a recession by the end of 2021, according to 72% of economists surveyed by the National Association for Business Economics in August. Investors should take that forecast with a grain of salt, but they should also be prepared for inevitable market downturns in the future.
It's counterproductive to dump all of your stocks based on those fears, since it's practically impossible to accurately time your exits and returns to the market without missing out on significant gains. A better strategy is to sell some riskier stocks and buy defensive plays that pay dividends and have more recession-resistant business models. Here are three stocks that fit that description: Dollar General (DG 0.02%), Verizon (VZ 0.64%), and PepsiCo (PEP 0.56%).
Image source: Getty Images.
Dollar GeneraL
Dollar General, the top "dollar store" chain in America, ended last quarter with 15,836 stores. It opens most of its stores in less densely populated areas, while its rival Dollar Tree (DLTR -0.07%) (and its subsidiary Family Dollar) mostly focus on urban and suburban markets.
Dollar General isn't a true "dollar" store like Dollar Tree, which sells all of its products for a dollar. Instead, it sells most of its products at 20%-40% discounts compared to traditional supermarkets and drugstores. Those steep discounts give it an edge against Walmart and Amazon.
Dollar General's same-store sales rose 3.2% in 2018 and another 3.9% in the first half of 2019. It boosted its store count 5% annually in the second quarter, making it one of the few brick-and-mortar retailers expanding through the "retail apocalypse".
Analysts expect Dollar General's revenue and earnings to rise 8% and 11%, respectively, this year. Its stock isn't cheap at 22 times forward earnings, and its forward dividend yield of 0.8% won't attract any serious income investors. But if a recession hits, Dollar General's growth should accelerate as cash-strapped shoppers flock to its discount stores -- which makes it a solid stock to own during an economic downturn.
Verizon
Verizon is another recession-resistant stock, because its wireless and wireline customers are mostly locked into contracts. The telco generates most of its revenue from its wireless business, which added 615,000 postpaid smartphone net additions last quarter. Revenue from that unit rose 3% annually to $23.6 billion last quarter and offset its weaker wireline revenue, which declined 4% to $7.1 billion.
Image source: Getty Images.
Verizon expects that balancing act to continue with low single-digit revenue and earnings growth for the full year. However, Verizon's recent deal with Disney (DIS -0.37%) -- which gives its new unlimited wireless, Fios Home Internet, and 5G Home Internet customers a free year of Disney+ -- could bolster both of its core businesses as Disney rolls out the streaming service in mid-November.
Verizon's top- and bottom-line growth won't impress growth-oriented investors, but the stock trades at just 12 times forward earnings and pays a hefty forward yield of 4%. It's hiked that dividend annually for 13 straight years, and it spent just 60% of its free cash flow (FCF) on that payout over the past 12 months. Simply put, Verizon's wide moat, low valuation, high yield, and robust cash flow growth all make it a great defensive play for a difficult market.
PepsiCo
PepsiCo is another defensive play that generated low-to-mid-single-digit revenue growth and high-single-digit earnings growth over the past five years.
It expects its organic revenue to rise 4% this year, but for its core EPS to dip 1% on a constant currency basis. It attributes that unusual decline to tough comparisons to 2018, when asset sales, refranchising moves, and a lower tax rate inflated its EPS. However, analysts still expect its earnings growth to even out with 4% annual growth over the next five years.
PepsiCo is a recession-resistant pick because its three core businesses -- PepsiCo beverages, Frito-Lay snacks, and Quaker Foods -- all generate steady growth throughout economic downturns. That growth should also continue, as Gen Z accounts for a larger slice of the consumer market -- a recent Piper Jaffray survey found that three of the top five snack brands for U.S. teens (Lay's, Doritos, and Cheetos) were all Frito-Lay brands.
PepsiCo continues to evolve by launching lower-calorie and sugarless sodas, non-carbonated beverages like water, juice, and tea, and healthier versions of Frito-Lay and Quaker products. The stock isn't cheap at 23 times forward earnings, but its forward dividend yield of 2.8% -- which it's raised annually for over four decades -- should set a floor under this defensive stock.
