Ready or not, the dreaded "r" word may be on its way: recession.
In mid-April, the minutes from the Federal Open Market Committee's March meeting noted that the 12-member body responsible for monetary policy decisions was projecting a "mild recession starting later this year." While the Fed's outlook isn't written in stone, it's a pretty clear indication that the central bank's hawkish monetary policy is pumping the brakes on the U.S. economy.
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Historically, stocks have performed quite poorly in the very short term following the official declaration of a recession by the eight-economist panel of the National Bureau of Economic Research. But this generally short-lived downturn in stocks represents an opportunity for investors with cash at the ready to do some shopping, especially when it comes to safe stocks -- i.e., profitable, time-tested, dividend-paying businesses.
If the U.S. does fall into a recession, there are three phenomenal safe stocks I'll be excited to add to.
NextEra Energy
The first magnificent safe stock I'll be itching to buy if the U.S. enters a recession and equity prices take a temporary hit is electric utility NextEra Energy (NEE 2.11%). Although interest rates have risen, which makes borrowing and financing new projects a bit pricier, NextEra has the predictable operating cash flow and competitive advantages investors (like me) crave.
What separates NextEra from the dozens of other publicly traded electric utilities is its portfolio. It entered 2023 with 65 gigawatts (GW) of generating capacity, 30 GW of which came from renewables. No utility in the world generates more capacity from solar (5 GW) or wind power (22 GW) than NextEra -- and that's unlikely to change anytime soon.
Yes, investing in green energy has been costly, but there are ample benefits to this forward-thinking approach. For instance, if Washington were to pass clean-energy legislation for utilities to follow, NextEra would be miles ahead of its competition. Further, the electricity-generation cost reductions associated with renewables is fueling a high-single-digit to low-double-digit earnings growth rate.
Additionally, NextEra Energy has its regulated operations to lean on. Regulated utilities require approval from state public utility commissions before rates can be raised. While this might sound like a nuisance, it ensures the company won't face potentially volatile wholesale electricity pricing.
Including NextEra's down year in 2022, shares of the company have delivered a positive total return, including dividends, in 19 of the past 21 years. That's a trend smart investors should continue to bet on.
U.S. Bancorp
The regional banking industry is navigating a crisis of confidence after the failures of SVB Financial's Silicon Valley Bank, Signature Bank, and First Republic Bank. U.S. Bancorp (USB 0.09%), the parent of U.S. Bank and the nation's largest regional bank by assets, is nothing like Silicon Valley Bank, Signature, or First Republic.
One of the reasons U.S. Bancorp is such a rock-solid business is the conservative approach its management team takes. Unlike the majority of money-center banks that got themselves into some serious trouble chasing risky derivative investments in the late 2000s, U.S. Bancorp has predominantly focused on growing its loans and deposits. It's not an exciting growth story, but focusing on these bread-and-butter banking elements has typically resulted in a return on assets of more than 1%.
Another catalyst for U.S. Bancorp, and a prime reason I became a shareholder, is its digital engagement trends. Between the start of 2020 and Aug. 31, 2022, the percentage of loan sales completed online or via mobile app increased from 45% to 62%. Also, 82% of its active customers are banking digitally. These digital transactions cost just a fraction of what in-person and phone-based interactions run. Over time, this digital push is helping to improve the operating efficiency of the company.
A final reason to be excited about U.S. Bancorp is the recently completed acquisition of Union Bank from Mitsubishi UFJ Financial Group. This deal added 1 million new retail customers with low deposit costs, all while giving U.S. Bancorp a bigger presence on the West Coast.
Even if the outlook for bank stocks somehow weakens, U.S. Bancorp looks like a steal. It's trading just above its book value, is yielding 5.6%, and can be purchased for closer to 7 times forecast earnings for 2023 and 2024.
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AT&T
A third phenomenal safe stock I'm excited to add to if the U.S. dips into a recession is AT&T (T 0.58%). Companies that generate predictable cash flow and offer a high-yield payout (AT&T is doling out 6.3%) are ideal buys during turbulent times.
What's great about telecom stocks is they've evolved into a near-necessity service. While having a smartphone and wireless/internet access isn't quite on the same level as needing food or water, historically low telecom churn rates show that consumers aren't willing to give up their wireless or broadband access, no matter how poorly the U.S. economy or stock market perform.
The steadiest catalyst for AT&T is the push to 5G download speeds. It took wireless companies about a decade to upgrade from 4G to 5G, which means the existing device replacement cycle should extend until 2025, if not beyond. For AT&T, the real benefit is an increase in data consumption. Data is the true margin driver for the company's wireless operating segment.
However, don't sleep on broadband. AT&T invested big bucks into midband spectrum to attract new broadband users with 5G download speeds. This investment looks to be paying off, with the company recording at least 1 million AT&T Fiber adds in each of the past five years. Broadband is the perfect lure for AT&T to boost its margin via service bundling.
Currently trading at only 7 times consensus earnings for 2023 and 2024, AT&T's downside appears limited.
