The U.S. hasn't yet entered a recession -- which is officially defined as two consecutive quarters of negative GDP growth -- but runaway inflation, stagnant wages, food shortages, rising interest rates, and geopolitical turmoil could all break this fragile economy's back in the near future.
The U.S. GDP already fell 1.5% in the first quarter of 2022, so another drop in the second quarter would kick off a fresh recession. If that happens, growth stocks will fall further as value stocks become even more attractive. So today I'll review three resilient blue chip stocks that you should add to your portfolio if the dreaded recession finally starts: Altria (MO 0.12%), Verizon (VZ -0.53%), and Johnson & Johnson (JNJ -0.69%).
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1. Altria
Altria is the top tobacco company in America. Its flagship Marlboro brand controlled 42.6% of the domestic cigarette market in the first quarter of 2022. It also sells cigars, oral tobacco products, and iQOS heated tobacco products (which heat up sticks of tobacco instead of burning them) through a partnership with Philip Morris International (PM 1.39%).
Altria might initially seem like a weak long-term investment, since U.S. smoking rates have steadily declined over the past six decades. However, Altria has also consistently raised its prices, reduced its expenses, and repurchased its shares to boost its earnings per share (EPS) as its revenue growth stalled out. It also consistently raised its dividend every year after spinning off its overseas operations as Philip Morris International in 2008.
Between 2011 and 2021, Altria's annual revenue rose from $23.8 billion to $26.0 billion, representing an anemic compound annual growth rate (CAGR) of 0.9%. However, its adjusted EPS rose at a CAGR of 8.4%. On its own, Altria's stock rose nearly 50% over the past 10 years. But after factoring in reinvested dividends, it generated a total return of over 150%. It also reduced its number of outstanding shares by more than 10%.
That stability makes Altria an ideal stock to own through a recession. Its business might merely tread water over the next few years, but its high forward yield of 7.3% and its low forward price-to-earnings ratio of 11 should limit its downside potential as other higher-growth stocks crumble.
2. Verizon
Verizon, the largest wireless carrier in the U.S., is another slow-growth stock that consistently generates stable returns throughout economic downturns. Between 2011 and 2021, its consolidated revenue rose from $110.9 billion to $133.6 billion, representing a CAGR of 1.9%. However, its adjusted EPS increased at a CAGR of 9.6% as it raised its prices and cut its costs.
Verizon's debt ballooned after it bought out Vodafone's (VOD -0.34%) 45% stake in Verizon Wireless for $130 billion in 2014. However, it didn't try to become a pay-TV and media giant like AT&T (T 1.88%), which clearly bit off more than it could chew with its acquisitions of DirecTV and Time Warner.
As a result, Verizon has remained a safer and more predictable telecom play than AT&T. It's raised its dividend annually for 15 consecutive years, and it currently pays a forward yield of nearly 5%.
Its stock price only rose 20% over the past 10 years, but it delivered a total return of nearly 90%. Verizon won't generate any massive near-term gains this year, but its stable business model and low forward P/E ratio of nine make it great defensive stock to own during a market downturn.
3. Johnson & Johnson
Last but not least, Johnson & Johnson's diversified portfolio of pharmaceutical, consumer healthcare, and medical device products makes it an ideal evergreen investment for long-term investors.
J&J's three core businesses often grow in tandem, but it can also easily offset a cyclical slowdown at one of its segments with the growth of its other two divisions. Between 2011 and 2021, J&J's revenue rose from $65 billion to $93.8 billion, representing a CAGR of 3.7%, even as its pharmaceutical division struggled with the patent expirations of several blockbuster drugs and its consumer business was hit by several safety-related lawsuits. Its adjusted EPS also increased at a CAGR of 7%.
J&J's growth rates aren't exciting, but it consistently plows its excess cash into buybacks and dividends. It reduced its outstanding shares by about 4% over the past decade, and it's a top Dividend King that has raised its dividend annually for 60 straight years. Its stock has risen nearly 180% over the past 10 years, which translated to a total return of more than 260%.
J&J currently pays a forward yield of 2.5%, and it's reasonably valued at 17 times forward earnings. The company also plans to spin off its entire consumer healthcare business as a new company in late 2023. J&J's stock might seem to barely budge from month to month (or even year to year), but that long-term stability makes it a great stock to hold if the market crashes.
