According to a Bloomberg poll conducted in December, 70% of surveyed economists predicted the U.S. could enter a recession in 2023. While this forecast is far from a guarantee, it does highlight some of the near-term risks investors face from a macroeconomic perspective -- and the need to find solid investments.
That said, Dollar General (DG -0.59%) and Phillip Morris International (PM 2.82%) could thrive even in a downturn, and their safe business models could richly reward long-term investors.
1. Phillip Morris International
Investors in search of recession-proof stocks need look no further than the tobacco industry. Because nicotine is addictive, its consumers will generally keep buying it even in a bad economy. Phillip Morris's international footprint and its pivot toward reduced-risk nicotine products give it another long-term edge.
U.S.-focused tobacco company Altria Group demonstrated the risk of geographic concentration when its partially owned vaping start-up, Juul Labs, was banned by the Food and Drug Administration from selling its products in the U.S. in June 2022. (The decision is being appealed.) With operations spread across the globe, Phillip Morris is more cushioned from regulatory problems in any specific country.
Its transition to reduced-risk tobacco products could also add another layer of safety and diversification to its revenue streams. As of the fourth quarter, smoke-free tobacco products (including vaporizers, oral tobacco, and other systems) represented 36% of its revenue. And the company plans to drive continued growth in these products through the $16 billion acquisition of tobacco company Swedish Match, a deal that will give it popular products like Zyn oral tobacco, and a more robust distribution network for its other offerings.
In 2023, management expects earnings per share to grow by around 6% to $6.15 at the midpoint of guidance. But while Phillip Morris has a history of generously rewarding shareholders, it has no planned share repurchases in 2023. This probably has something to do with the Swedish Match acquisition. That said, its dividend boasts a strong yield of 5% at the current share price, and management has increased the payout annually for 14 consecutive years.
2. Dollar General
With its stock up by 18% over the last 12 months, Dollar General completely ducked the 2022 bear market that has left the S&P 500 down 7% over the same time frame. The company's resilience in the face of macroeconomic challenges should help it continue to deliver excellent returns for its shareholders.
Image source: Getty Images.
Unlike big box retailers like Walmart or Target, Dollar General focuses on the deep discount side of the market. It keeps prices low through its no-frills shopping experience and its focus on areas where the costs of both real estate and labor are low. This strategy is already paying off as consumers grapple with challenges like inflation and higher interest rates.
The chain's third-quarter revenue jumped 11.1% year over year to $9.5 billion, powered by a combination of same-store sales growth and the opening of 734 new locations, which brought its total to 18,130. But while Dollar General maintained a respectable top-line expansion rate, its consistent profitability is the more interesting story. Operating profit jumped 10.5% to $735.5 million, and the company returned value to shareholders via share repurchases that totaled $546 million in the period.
Stock buybacks can be great news for investors because they increase the fundamental value of the shares remaining in circulation relative to a company's future earnings. Dollar General also pays a dividend that yields around 1% at its current share price.
The soft landing might not happen
Stock indexes rallied at the start of 2023 because many market participants believed the Federal Reserve would succeed at bringing U.S. inflation under control without triggering a major economic downturn. But based on a host of indicators that suggest the economy is still running hot, the Fed may have to keep raising rates further and keep them higher for longer, which increases the possibility of a recession as opposed to the hoped-for soft landing.
Investors should consider putting some of their portfolios in lower-risk stocks like Dollar General and Philip Morris to help hedge against this outcome.
