The Leading Economic Index (LEI), a notable economic gauge by the nonprofit Conference Board, declined by another 1% in December. That was steeper than the 0.7% drop economists expected. It was the 10th straight monthly decline for the LEI. That's notable because it often peaks about a year ahead of a recession.
While it's possible that the economy could avoid a recession, a recent poll of economists by The Wall Street Journal put the probability of a recession at 61% this year. This means investors should consider taking steps to help insulate their portfolio from a potential economic downturn.
One way to do that is by investing in companies with relatively recession-proof businesses. These companies benefit from fairly steady demand for their products and services, enabling them to produce resilient profits. Three economically durable options to consider are Agree Realty (ADC +0.13%), NextEra Energy (NEE +0.03%), and Republic Services (RSG +0.38%).
1. Agree Realty: A recession-resilient real estate portfolio
Consumer spending tends to decline during a recession. Many shoppers put off making large purchases (like buying a new car or home) and seek to save money by trading down to lower-priced merchandise. These actions benefit grocery stores (more people eat at home versus restaurants), dollar stores, off-price retailers, and auto parts and service centers, which often see stable to growing sales during a downturn.
This trend plays right into the strategy of Agree Realty. The real estate investment trust (REIT) built a durable portfolio focused around owning properties triple net leased (NNN) to economically resilient retailers. It also concentrates on leasing its properties to financially strong operators. More than two-thirds of its rent comes from investment-grade tenants, indicating they have the financial strength to meet their obligations should economic conditions deteriorate.
NYSE: ADC
Key Data Points
The company's durable real estate portfolio and NNN leases enable it to generate very stable rental income. It pays out a conservative portion of that money to investors via an attractive dividend that currently yields 3.8%.
Agree Realty further supports its payout with a strong, investment-grade balance sheet. That gives it the financial flexibility to continue acquiring high-quality, income-producing retail properties. Those new additions should enable Agree Realty to continue growing its dividend. The REIT has expanded its payout at a 6.1% compound annual rate over the last decade.
2. NextEra Energy: Plenty of power to continue growing
Demand for electricity and gas tends to be recession resistant because customers need to keep the lights on and heat their homes and businesses. Meanwhile, government regulators set rates. These factors enable utilities to generate very stable earnings throughout the economic cycle.
Those steady earnings provide a nice income base for NextEra Energy. It also generates predictable cash flow from long-term contracts underpinning the natural gas pipelines, electricity transmission lines, and renewable energy generating facilities in its energy resources segment. It pays out a conservative portion of its cash flow to investors via a dividend that yields 2.1%.
NYSE: NEE
Key Data Points
NextEra Energy uses the cash it retains and its strong balance sheet to invest in sustaining and expanding its utility operations and growing its energy resources segment. It has $85 billion to $95 billion of investments lined up through 2025, driven by increasing demand for clean energy.
These investments have the utility on track to expand its earnings by 10% per year through 2025 at the high end of its guidance ranges. That should support dividend growth of around 10% annually through at least 2024. That's powerful growth for a utility, especially amid a potential recession.
3. Republic Services: Turning trash into stable cash flow
Consumers and businesses also need their garbage and recyclables collected during a recession. This means environmental services companies tend to generate economically resilient earnings.
As one of the leaders in the sector, Republic Services is a great defensive stock to consider owning. The company generates lots of steady cash flow, giving it the funds to reinvest in expanding its business and return to shareholders through repurchases and dividends.
NYSE: RSG
Key Data Points
The company spent $2.1 billion to buy US Ecology last year, expanding its environmental services footprint in a deal that immediately boosted its earnings and free cash flow. Republic Services also formed a joint venture with Archaea Energy, now part of BP, contributing $300 million to develop 39 new renewable natural gas projects at its landfills over the next five years.
Even with those investments, Republic continued to return cash to shareholders, sending them $640 million through the third quarter by repurchasing $203.5 million of its stock and paying $436.5 million out in dividends (its payout currently yields 1.6%). Thanks to the overall stability of its business model, Republic will continue to generate durable cash flow to fund new investments and cash returns to investors.
Take shelter in these economically resilient stocks
With a key recession indicator flashing warning signs, most economists expect a downturn this year. Because of that, investors should consider improving the recession resiliency of their portfolios by adding some defensive stocks like Agree Realty, NextEra Energy, and Republic Services. They can deliver stability, putting an investor's portfolio in a better position to weather a potential economic storm this year.
