The COVID-19 pandemic stoked deep fears about how the economy would cope with the shutdowns required to get the disease under control. Consequently, stocks sold off in February and March as job losses and closures escalated.
However, investors often forget that some companies can prosper, even in harsh conditions, and may actually perform better when a recession occurs.
For those who don't forget, the recent crisis may a reason to reassess their stock portfolio and add some companies that can generate positive returns regardless of the state of the broader economy. Companies like Dollar Tree (NASDAQ:DLTR), Innovative Industrial Properties (NYSE:IIPR), and Verizon (NYSE:VZ) appear to match that description.
1. Dollar Tree
The Dollar Tree empire is made up of two extreme discounters. The company originally established the Dollar Tree line of stores, which sells most of its items at the $1 price point and the rest under $1. It later acquired Family Dollar. While Family Dollar stores also sells $1 and under items, they don't operate under the price limit of its sister brand.
Dollar Tree stock took a hit when it acquired Family Dollar in 2015. A failure to integrate the new brand into the broader company led to stock volatility, forced Family Dollar conversions to Dollar Tree stores, and occasional outright closures. This placed its most direct competitor, Dollar General (NYSE:DG), in a more favorable light as an alternative investment.
But with the COVID-19 crisis and the recessionary indicators that came with it Family Dollar stores ended up getting a performance boost. Many of the millions of newly unemployed were looking for ways to save money in trying times and were drawn to stores like Family Dollar. Dollar Tree stores also partially benefited, but supply chain issues with China, as well as a lack of Easter holiday sales due to the coronavirus outbreak, created lower sales overall.
Still, with supply chains realigning and millions still unemployed, shoppers will likely continue to frequent both stores.
Dollar Tree stock declined in February along with the broader market. But surging revenue from Family Dollar (which, along with Dollar Tree, were deemed essential businesses and remained open) has helped the company's stock recover its value and it is trading up for 2020. Dollar Tree stock trades at about 20 times forward earnings, which suggests the stock is trading at a premium. But analysts expect average annual profit increases of approximately 7% per year over the next five years.
Dollar Tree may continue to face challenges with Chinese suppliers and integrating Family Dollar into the fold. But with recessionary unemployment rates likely to persist for the foreseeable future, the company's brands should continue to be popular with consumers and with investors.
2. Innovative Industrial Properties
Innovative Industrial Properties allows investors in the marijuana industry to benefit in two ways. First, marijuana companies are a trending investment sector at the moment and are considered one of the few recession-proof sectors of the market. Second, while marijuana growers are still considered risky investments, a real estate investment trust (REIT) which rents property to cannabis growers has some insulation from the risks inherent in the industry. Being a REIT also somewhat shields the company from the excessive regulations associated with marijuana growers and allows Innovative Industrial to earn a profit and pay a dividend while many grower stocks are losing money and not rewarding shareholders.
Over the last year, Innovative Industrial has benefited from two key trends. One trend involves small start-ups selling their production properties to generate ready cash flow needed to operate and then leasing the property back immediately from the company they sold it to (in this case, Innovative Industries). The second trend is a change in legislation. Where previous laws limited the Innovative Industries' reach to states that had legalized medical or recreational cannabis, now federal hemp production legalization means the company can operate properties in all 50 states.
Because the potential is still not being realized for this industry, this stock trades at a forward P/E of 23.4, meaning it seels at a premium. But this appears reasonable considering that analysts predict earnings increases of 78.8% this year and 37.2% in fiscal 2021.
As a REIT, Innovative Industrial Properties must pay out at least 90% of net income to its shareholders. The company has not disappointed in that regard and its $4 per-share dividend payout yields about 4.6%. This dividend has also increased every year since Innovative Industrial paid its first dividend in 2017.
Grandview Research forecasts a compound annual growth rate for the global cannabis industry of 18.1% through 2027. This should ensure that the company will continue to attract tenants.
As hemp grows more popular and as more jurisdictions loosen restrictions on marijuana use, demand for properties like the type owned by Innovative Industrial should continue to surge.
Verizon has struggled somewhat recently as declining margins in its wireless business and massive investments in 5G infrastructure weighed on the company. Last year alone, Verizon spent $17.9 billion on capital expenditures. This has contributed to the company's $106.56 billion long-term debt load. It also represents a significant burden for a company worth $61.65 billion after subtracting liabilities from assets.
Still, it does not have the much higher debt load and side business distractions of archrival AT&T (NYSE:T). Moreover, consumers need communication and internet connectivity in good times and bad. Even if the economy continues to struggle, the march to 5G will probably continue and the need for smartphones and internet connectivity will be there.
And Verizon has an investing advantage over its other big rival, T-Mobile (NASDAQ:TMUS), as Verizon's shareholders receive a dividend. Verizon paid out $2.46 per share last year and its payout yields about 4.3%. This payout has risen every year for more than a decade. The dividend claims about 51.7% of company profits, leaving plenty of free cash flow left over for infrastructure spending, debt paydown, dividend increases, and other investments.
This has left Verizon the growth-and-income play of the wireless industry. Verizon has risen by about 121% over the last 10 years. While that does not beat T-Mobile, it comes out well ahead of AT&T, which (with its dividend yield of about 6.6%) is primarily an income play.
In addition to a generous payout, the company sells for just 11.9 times forward earnings. Admittedly, some may sour on Verizon as analysts see profit growth averaging 1.9% per year over the next five years. Still, with 5G adoption expected to grow for years to come, Verizon should keep producing growth and income regardless of the broader economy's performance.