Recession fears have been at the forefront of investor attention in 2019.
A recent yield curve inversion, a slowdown in global growth, and declining reports in the Purchasing Manager's Index from the Institute for Supply Management have been repeatedly cited as harbingers for an eventual economic downturn.
Although these latest fears of a recession may or may not be overblown, one thing is certain: A recession will happen again. That creates a sense of concern for many, as no one knows when it will hit, how long it will last, and just how severe it will be.
So how can investors protect themselves in periods of economic contraction?
Moving a portion of your investments to consumer staples stocks is a good place to start.
Unlike consumer discretionary companies, consumer staples companies produce products that consumers need regardless of the overarching condition of the economy. Goods like food supplies, personal healthcare items, and tobacco all meet the consumer staples criteria.
Some of the best consumer staples companies out there today are Procter & Gamble (NYSE:PG), The Hershey Company (NYSE:HSY), and Philip Morris International (NYSE:PM). Here are three reasons why it's not a bad idea to hold these companies during a market downturn.
1. Stable demand and less volatility
Consumer spending -- which accounts for 70% of the overall U.S. economy -- slows down when the future of the economy looks bleak.
But demand for consumer staple companies' products doesn't fluctuate nearly as much as it does in other product categories. This translates into more predictable earnings and dividend distributions.
Procter & Gamble sells an array of diversified products that are household names, from paper towels and laundry detergent to shaving cream and toilet paper. It's hard to see consumers cutting back on these products because the economy is in a rut, and maybe that's why P&G just increased its year-over-year sales growth projections in 2020 from a previous range of 3% to 4% to a range of 4% to 5%.
Hershey and Philip Morris International are similarly stable.
Back during the financial crisis of 2008-09, the S&P 500 index fell more than 38%. In contrast, Hershey's stock only fell 11.3% while PMI's only decreased by 11.9% over the same time period.
Steady, predictable demand has helped these companies outperform the broader market, even in the midst of a violent economic contraction. I wouldn't be surprised if all three companies outperformed the S&P 500 in the next recession.
2. A history of rewarding shareholders
Procter & Gamble and Hershey have been in business for over 100 years. Philip Morris International was spun off parent company Altria (NYSE:MO) in 2008. That company was a rebranding of one that began operations in the U.S. under the name Philip Morris & Co. in 1902. (Relatedly, Altria and Philip Morris International were in talks this year to re-merge, but talks stagnated this fall, in part due to lack of investor support.)
These companies' decades in business illustrate that each company has successfully navigated through some of the worst economic environments the modern financial world has faced. That durability offers some proof of both successful business operations and brand loyalty.
During a recession, it's not uncommon for companies to cut or put dividends on hold. But over the past 20 years, Hershey has never cut its dividend, and has only failed to raise the dividend once.
That should come as welcome news for investors worried about steady investment income during market downturns. Hershey's dividend -- which currently yields 2.15% -- seems to be resistant to macroeconomic pressures.
Like Hershey, P&G and Phillip Morris have a track record of rewarding shareholders. P&G has raised its dividend yearly for 63 consecutive years, while Philip Morris has been paying dividends for its 11 straight years as a separate company, and currently yields a whopping 5.64% yield.
3. International exposure
As a consumer staples investor, it's also important to have exposure abroad.
To start, Philip Morris International operates almost everywhere in the world except in the U.S. (where Altria operates). In fact, the company owns six of the world's top 15 international cigarette brands.
Although sales of cigarettes have been declining, Philip Morris' IQOS -- its tobacco heating system -- has grown quickly. Shipment volume for the IQOS device increased at a torrid 84.8% pace on a year-over-year basis.
Widespread and diversified international exposure should serve as a boon to consumer staples investors who are worried about a slowdown in any of the countries that Philip Morris' does business with.
The same holds true for both P&G and Hershey. Procter & Gamble's products are available in 180 countries, while Hershey products are available in 60 countries.
Although economies in different parts of the world are affected by slowdowns elsewhere, it's rare that the entire globe experiences a synchronized recession. With an international presence, these companies have extra ballast against the pressures affecting any single economy.