Recent indicators suggest a recession could be just around the corner. A potential downturn could have a big impact on earnings for economically sensitive companies, which would likely put more weight on their stock prices.
However, some companies are relatively recession-proof. They benefit from stable demand and pricing, which enables them to deliver steadily rising earnings and dividends. Three companies with relatively recession-resistant businesses are Kinder Morgan (KMI -0.32%), American Water Works (AWK 0.51%), and NextEra Energy (NEE 1.36%). These companies can help safeguard your portfolio from a potential economic storm this year.
Plenty of room for adversity
Reuben Gregg Brewer (Kinder Morgan): Recessions can be tough on energy stocks because they tend to reduce demand for oil and natural gas. That normally leads to lower prices for these commodities and, thus, lower earnings for energy producers.
But there's one niche of the energy sector that moves to a different beat: midstream operators. And that's why dividend investors worried about a recession might want to look at Kinder Morgan.
Kinder Morgan owns a massive portfolio of energy infrastructure assets in North America. It basically helps to move oil and natural gas from where they are drilled to where they get processed and consumed. But the key factor here is that Kinder Morgan charges fees for the use of its assets, so the prices of the commodities flowing through its system are less important than demand for those commodities. Even during a recession, demand for fuel doesn't usually plunge; it simply dips.
Even more interesting is that Kinder Morgan's distributable cash flow covered its dividend by nearly 2 times in 2022. That provides a huge cushion for the dividend if there were to be a recession -- or any other type of adversity for that matter. A dividend cut in 2016 (after management talked up a potential increase) might make this an inappropriate choice for risk-averse dividend investors. But, if you can forgive that cut, the dividend and fat 6.1% dividend yield here look safe no matter what 2023 brings.
A bankable stock for all times
Neha Chamaria (American Water Works): Owning a stock from a defensive sector is a tried-and-tested way to prepare your portfolio for a recession, but buying a defensive stock that can also pay you a steady stream of passive income could be an even better bet in a slowdown. American Water Works is one such defensive stock that's also one heck of a dividend-paying company you wouldn't regret owning at all times.
American Water Works is the largest publicly traded water and wastewater utility in the U.S., serving more than 14 million people in 24 states. It also has a military services group that serves 18 military installations in the U.S. across the Air Force, the Army, and the Navy. The company has some solid growth plans right now that add to the stock's appeal.
American Water Works aims to grow its earnings per share (EPS) at a compound annual growth rate (CAGR) of 7% to 9% between 2022 and 2026. While regulated capital expenditures and base rate increases should drive the bulk of that growth, the water utility also expects acquisitions to add considerable value going forward. In 2022 alone, American Water Works acquired nearly 65,000 customers across six states through acquisitions.
Above all, American Water Works is targeting 7% to 10% CAGR in dividends under its 2022-2026 growth program. That's sold dividend growth, and although the stock yields only 1.7%, rising dividends could hugely add to your total returns from the stock as it has in the past, even if the economy slips into a recession.
Visible growth for the next few years
Matt DiLallo (NextEra Energy): Utilities tend to be pretty recession-proof. The demand for electricity and natural gas by homes and businesses is relatively predictable. Meanwhile, government regulators set the rates for delivering these services.
Those features provide leading utility NextEra Energy with a stable revenue base. In addition, the company's energy resources segment sells renewable power to other utilities and end users under long-term fixed-rate contracts. It also operates natural gas pipelines and energy transmission lines supported by similar agreements. These contracts give it additional stable revenue streams.
NextEra Energy's steady cash flow enables it to pay an above-average dividend (it currently yields 2.2%) and invest in expansion projects. The company also has a strong, investment-grade balance sheet, providing further support for the dividend and its expansion.
The company has a vast backlog of expansion projects, including new wind farms, solar energy projects, utility expansions, and energy transmission lines. Those drivers recently empowered the company to extend its long-term growth outlook by another year. It expects to grow its adjusted earnings per share by a 6% to 8% annual rate through at least 2026.
Despite concerns about a recession, the company anticipates delivering about 5% earnings growth this year at the midpoint of its guidance range before reaccelerating in 2024 and beyond. Meanwhile, it plans to grow its dividend at around 10% annually through next year.
That combination of steadily rising earnings and dividend income should enable NextEra to continue producing attractive total returns. The company's total returns have significantly outpaced the S&P 500 and other utilities over the past three-, five-, 10-, and 15-year periods.
