Depending on whom you ask, the economy is either already in a recession or about to be in one. Interest rates and inflation have soared and the stock market has flailed all year and that has many investors looking for a port in this storm.
If you aren't interested in fixed-income options that benefited from rising interest rates, now might be a good time to consider defensive stocks from well-established companies that proved they can keep churning out earnings -- and dividends -- during the down times.
For many reasons, a good equity to consider here is Agree Realty (ADC 1.18%), a real estate investment trust (REIT) that makes its money from net-lease deals with retailers -- a lot of them and for a long time.
Reasons to agree on Agree
Since its 1994 initial public offering (IPO), Agree Realty has nearly doubled the S&P 500 in total return (that's capital gains and dividends). Check out below what that would mean for, say, a $1,000 investment made then and held until now.
ADC Total Return Level data by YCharts
There have been a lot of economic downturns over those nearly three decades, including the dot-com implosion and the Great Recession, and the one that began as 2022 dawned. Agree Realty also is a standout there, as the chart below shows.
ADC Total Return Level data by YCharts
While that's no guarantee of future performance, there are other good reasons to believe Agree Realty will continue to nicely reward its investors through the economic downturn that's widely assumed to be imminent.
Continuity and a growing portfolio of reliable rent payers
Joey Agree has been the CEO since 2013, and he took the helm from his father, Richard Agree, a shopping center developer who founded the company in 1971 and remains executive chairman. That suggests some real continuity on the management end.
As for the company's portfolio, Agree has built its holdings to 1,707 properties. Among these properties, two-thirds are investment-grade, necessity-based tenants such as Walmart, Tractor Supply, Dollar General, Kroger, Home Depot, Lowe's, and others that appear regularly on lists of recession-proof stocks.
As for its geographic spread, Agree has a presence in all 48 continental states, and sector diversity. The company's top three sectors are grocery stores, home improvement, and tire and auto service, each at just more than 9% of the annual rent.
Agree bought 98 properties for $360 million in the third quarter alone and just raised its guidance to between $1.6 billion and $1.7 billion in total acquisitions for 2022 by year-end. To help pay for that, management raised $800 million of equity and debt capital during the third quarter, including $300 million in senior unsecured notes due in 2032 that Agree's solid credit rating enabled the company to secure for an interest rate of only 3.76%. That's all while maintaining an impressive pro forma ratio of net debt to recurring earnings before interest, taxes, depreciation, and amortization (EBITDA) of 3.1 times.
Funds from operations (FFO) is a critical metric for REIT performance. As you can see here, Agree has raised its sharply, along with earnings per share, since the pandemic kicked off what was an epic battering of the retail market.
ADC Normalized Diluted EPS (TTM) data by YCharts
A dividend payout is the cherry atop the sundae from this defensive stalwart
Tax law requires REITs to pay out at least 90% of their taxable income to shareholders. Agree Realty has no problem there. The trust has raised its payout by an average of 5.8% a year for the past 10 years, including a 5.7% increase in October.
In sum, Agree is a solid defensive stock by a lot of measures that together add up to make it a good pick for income investors and anyone else interested in taking a stake in an equity that should probably fare better than most in the rocky months that are expected to arrive soon. Or the ones that are already here.
