On Thursday, the U.S. Bureau of Economic Analysis reported that real gross domestic product (GDP) decreased at an annual rate of 0.9% for the second quarter of 2022 -- marking the second consecutive quarter of declining real GDP. Real GDP is a more useful measure than GDP because it factors in inflation. A declining real GDP number indicates that inflation is outpacing the economy's ability to grow. Similarly, real GDP declined in the first half of 2020 due to the COVID-19 pandemic-induced recession.
If you have mounting recession fears or are concerned about rising interest rates, you aren't alone. However, selling everything isn't a wise long-term option. Instead, it could be a good idea to turn your attention toward top companies that have endured past economic downturns. Procter & Gamble (PG -0.06%), Essential Utilities (WTRG 0.23%), and Baker Hughes (BKR 1.25%) are three dividend stocks that can outlast a prolonged recession. Here's why each is a great buy now.
A low-risk, low-reward investment opportunity
Daniel Foelber (Procter & Gamble): In response to its Q4 fiscal 2022 results, Procter & Gamble stock fell 6.2% on Friday despite a strong up day for the broader market. The consumer staples giant posted lower volumes across its beauty, grooming, and fabric and home segment, and flat volume growth in healthcare as well as baby, feminine, and family care. Its results were also impacted by adverse foreign exchange effects.
However, P&G was able to grow its fiscal 2022 sales by 5% and diluted earnings per share by 6% compared to fiscal 2021. It also returned $8.8 billion to investors through its dividend and $10 billion through share repurchases. P&G also kept its Dividend King streak alive -- it has paid and raised its dividend for 66 consecutive years. P&G has a dividend yield of 2.6%.
While investors are likely happy with the company's ability to create shareholder value through the dividend and buybacks, the stock's decline may have been largely due to the company's weak guidance. For fiscal 2023 -- which represents the period from July 1, 2022, to June 30, 2023 -- P&G is only guiding for all-in sales growth of 2%, partially due to a 3 percentage point headwind from foreign exchange. What's more, P&G is only guiding for 0% to 4% growth in earnings per share (EPS) -- or $5.93 EPS at the midpoint versus $5.81 EPS in fiscal 2022.
The guidance gives P&G a forward price-to-earnings ratio of 23.4 -- above the average multiple in the S&P 500. Yet P&G is one of the few low-growth companies that arguably deserves a premium valuation. Although growth is slowing, P&G's product mix is largely focused on essentials across different price points -- which allows customers to cut spending while staying within the P&G umbrella of name brand products.
P&G's consistency and ability to support its massive share buyback and dividend program with cash, not debt, make it one of the premier passive income stocks on the market. P&G isn't going to wow investors with outsized growth. And it isn't a particularly innovative company. But it is a reliable business that comes through during good times and bad.
Dive into this recession-ready dividend stock
Scott Levine (Essential Utilities): Cancelling a streaming service. Eating at home more frequently. These choices will figure prominently in consumers' thoughts during a recession. Drinking less water, though? Not a chance. Cutting water consumption is hardly a consideration to stretch the family dollar. Consequently, water utility stocks like Essential Utilities -- and its 2.1% forward dividend yield -- provide a solid defensive investment.
It's common for investors to turn to conservative investments like utilities during times of economic uncertainty. Over the past six months, shares of Essential Utilities are up 8.5% while the S&P 500 has sunk 7.4%, but that doesn't mean that the stock is too pricey to pick up right now. In fact, it's trading at 30 times trailing earnings -- a discount to its five-year average P/E of 35.
Companies are currently wrangling with supply chain and energy cost headwinds, but Essential Utilities is much less sensitive to these issues plaguing its top and bottom lines. This, as well as the fact that Essential Utilities has an investment-grade balance sheet, should pique the interest of risk-averse investors. The company's average payout ratio of 66% over the past decade is icing on the cake.
Unlike regional water utilities that may be affected by adverse local weather conditions, Essential Utilities mitigates risk by providing water and wastewater service to millions of customers in various states across the U.S., including (but not limited to) Texas, North Carolina, Pennsylvania, and Illinois. In addition, the company diversifies its revenue stream by providing gas service to customers in West Virginia, Kentucky, and Pennsylvania. For those looking to grow some passive income while waiting for the recession to recede, Essential Utilities deserves a place on investors' radars.
Baker Hughes has upside potential in a moderate slowdown scenario
Lee Samaha (Baker Hughes): This might seem controversial, but I will write it anyway. An oil services stock like Baker Hughes (currently yielding 3%) may be an excellent way to play a recessionary scenario. Normally, anyone talking about recession would run an oil pipeline length before buying into the oil services sector. After all, oil demand correlates with the economy, and traditionally, oil exploration companies have ramped up supply when times are good, only to create a glut when demand tails off.
However, things may be different this time. For example, the equity market has been focused on a recessionary outlook, selling off aggressively this year, while the bond market is also pricing in recessionary scenarios. However, the price of oil is still around the $100 a barrel mark.
That's usually seen as a price conducive to investment, and in any case, Baker Hughes has a long-term growth opportunity from burgeoning liquefied natural gas investment too. In addition, management talked of potential profitability increases via restructuring the company. Meanwhile, there's still a need for investment in the industry due to the multi-year slump in capital spending by oil majors.
While the long-term outlook isn't fantastic due to the threat from renewable energy as a replacement energy source, the reality is the world will need oil for years to come, and definitely until after the next recession is over. Given a mild recession and some limited demand destruction, the supply outlook is favorable to support a relatively high price of oil, and that's good news for Baker Hughes.