Inflation has come down in the U.S. in recent months, but it remains at its highest level in decades. While investors are optimistic about a continuing downtrend of inflation, a potential recession and interest rates that stay higher for longer could load down the economy and stocks.
According to Howard Marks, co-founder and co-chairman of Oaktree Capital Management, the investment environment has undergone a "sea change" in recent years. Marks says several factors, including a reversing of globalization, tight labor markets, rising wages, and a growing economy, could keep inflation higher than what investors have grown accustomed to in the last few decades. If this is the case, the era of ultra-low interest rates and stimulative policies could be over.
While no one can predict what will happen next, now is as good a time as ever to ensure you own some resilient companies in your portfolio that can withstand potential economic turbulence.
Image source: Waste Management.
Resilient companies are those that can do well in the event of an economic downturn like a recession because they provide something that is always in demand. These companies produce consistent revenue and strong cash flows and reward investors with dividends or share buybacks, making them more stable stocks with lower volatility.
Three resilient companies that can solidify your portfolio today are Waste Management (WM 0.60%), McDonald's (MCD 0.47%), and Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%). Here's what each of these companies brings to the table.
1. Garbage collection and disposal will always be in demand
Operating over 259 landfill sites across the U.S. and Canada, Waste Management is a crucial part of North American infrastructure.
You're likely familiar with Waste Management's residential trash pickup service, but that component is only 15% of its business. It also provides commercial and industrial trash collection, transfer, recycling, and landfill storage to round out the business.
Image source: Waste Management.
Waste Management's resilience comes from the fact that people will always need their trash picked up. It also has a robust competitive advantage because high barriers to entry make it difficult to break into the landfill space. Over the last five years, it made 88 acquisitions -- making it the largest U.S. waste and recycling company with a 24% market share.
The company faced a big test during the pandemic when governments shut down businesses and travel services. Despite the drop in business activity, Waste Management's 2020 revenue declined by only 1.5%, while diluted earnings per share (EPS) fell 10%. It has since bounced back in a big way, with revenue and diluted EPS growing 13.8% and 23.7% annually over the following two years.
Its free cash flow, or the cash left over after paying for operations and capital expenditures, was nearly $2 billion during the year. This is cash that the company can use to pay down debt or reward investors through dividends and stock buybacks. Last year, the company spent $1.5 billion buying back stocks and another $1 billion paying dividends, which yielded 1.72% for investors.
Waste Management is a critical part of waste disposal in North America, and its resilient business can perform regardless of what the economy does.
2. McDonald's affordable options give it stability during inflationary and recessionary times
McDonald's owns a globally recognized fast-food brand, and rising prices in the last year have boosted its business as consumers seek low-cost alternatives. In the fourth quarter, its global comparable-store sales increased by 12%, with double-digit increases in both the U.S. and internationally.
McDonald's business proved resilient amid inflation and recessions. From 2007 to 2009, the fast-food chain saw its diluted EPS double from $1.98 to $4.11. During this period, its stock returned 54% compared to the S&P 500, which lost 16%.
MCD Total Return Level data by YCharts
McDonald's resilient business generates strong free cash flow, and last year it rewarded investors with $3.9 billion in share repurchases and $4.2 billion in dividends, giving it a yield of 2.15%. Its business produces strong cash flows that consistently reward investors and can help stabilize your portfolio amid stubbornly higher inflation or an economic downturn in the next couple of years.
3. Berkshire Hathaway has a secret to success that most may not be familiar with
The last resilient business that can solidify your portfolio is Berkshire Hathaway. Warren Buffett's holding company holds stock in several publicly traded companies, including Apple, Bank of America, and Chevron; it also wholly owns several other prominent companies.
Berkshire Hathaway's long-term success can be attributed to something investors often overlook -- its massive insurance businesses. Berkshire owns several insurers, including GEICO, General Re, Berkshire Hathaway Reinsurance, National Indemnity, and its most recent $11.6 billion acquisition, Allegheny.
For Buffett, insurance is "a very large chunk of Berkshire's value," and insurance products "will never be obsolete, and sales volume will generally increase along with both economic growth and inflation."
Buffett loves the insurance business because it is a steady source of cash flow. Insurers collect premiums before ever providing their services. Because they don't pay out cash until customers make a claim, they sit on a pile of money they can hold and invest but don't own. This cash is called "float," and Buffett credits the company's float for much of its success.
Since Berkshire first purchased National Indemnity in 1967 through last year, its float has grown from $19 million to $147 billion, or 18% annually. Because its cash flows are pretty reliable, this float is "sticky," allowing Berkshire to take a long-term investment approach.
SPY Total Return Level data by YCharts
Berkshire Hathaway has a long history of outperformance, and its insurance business is a big part of that. The consistent business provides Buffett and his team with steady cash flows that they can put to work in stocks -- just like they did all through 2022. This consistent cash generation makes Berkshire a resilient business regardless of what the economy does.
