5 Stocks That Should Be Safe in a Recession

Some companies -- usually the kind that are very boring -- provide stuff that we always need. It doesn’t matter if the economy is booming or in recession. What kind of products are we talking about? Diapers, heating, food -- the basic needs. By investing in the stocks of such companies, you help provide a buffer for your portfolio

But it isn’t enough to just invest in companies that are recession-proof. You also want to find stocks that won’t crater in a recession. Consider this: from October 2007 to November 2008, sales at Amazon increased 22% -- despite the financial crisis. Shares, on the other hand, fell 65%. Amazon was a high-priced stock that couldn’t withstand the pessimism. That’s why we also want to find stocks that have modest -- at best -- expectations baked into their valuations.

ALSO READ: How to Prepare for a Recession

If you’re interested in Socially Responsible Investing (SRI), this may not be the stock for you. Smoking can wreak havoc on your health. But given its addictive nature, it’s also a solid investment. When smokers gain affinity to a brand, they’ll do just about anything to buy it. That’s why -- despite smoking rates falling across the country -- Altria (NYSE: MO) has remained a force. The owner of the ultra-popular Marlboro brand (in the U.S.) is able to increase prices without losing customers. That leads to compounding returns -- in a recession or not.

Because smokers are so loyal to the Marlboro brand, Altria can collect lots of cash for a product that costs very little to produce. Over the past year, for instance, the company saw free cash flow register at $6.7 billion. The stock trades at only 12 times that figure -- a very fair price. Altria used 87% of that cash flow to pay the dividend. That means there’s not tons of room for growth. But with a yield that’s currently above 7.0%, that shouldn’t be a concern.

Johnson & Johnson (NYSE: JNJ) is the very definition of a medical conglomerate. The company’s consumer division (think: Band-Aids, Aveeno, Listerine) is the most well-known, but has brought in 17% of sales in the first-half of the year. The medical device (32% of revenue) and pharmaceutical (51%) divisions do the lion’s share of the work for the company. Critically, all of these things -- shampoos, surgical equipment, arthritis medication -- are needed in both boom and bust times.

ALSO READ: Is Johnson & Johnson a Buy?

Right now, the public is focused on an opioid ruling that went against Johnson & Johnson. While the ruling isn’t unimportant, it also isn’t likely to drastically affect the company. Over the past 12 months, Johnson & Johnson has raked in $18.4 billion in free cash flow. The stock trades for 18 times that figure -- below the market average. And the dividend -- currently yielding 2.9% -- has only eaten up 53% of that cash flow. That means the payout is both sustainable and has room for growth.

The need to connect is primal. And in the digital age, the internet -- via your smartphone -- is providing the most popular way for people to connect. That won’t change during an economic downturn. With a 35% share of wireless subscriptions in America, Verizon (NYSE: VZ) is the leader in the category. It is also the first to market with 5G technology -- giving it further differentiation from the likes of AT&T and T-Mobile.

Infrastructure costs for telecom giants are enormous. It’s not cheap to lay fiber-optic wire or rent thousands of towers to broadcast signals. But once paid, the cash that flows in from customers is generous. Over the past year, Verizon collected $17 billion in free cash flow. Like the others on this list, Verizon’s stock trades for a below-market average of 14 times free cash flow. It’s 4.1% dividend yield is also very safe, as only 59% of free cash flow was needed to pay it.

Coming out of the Great Recession, it looked like Walmart (NYSE: WMT) might endure a slow death at the hands of Amazon and the e-commerce movement. But with the 2016 acquisition of Jet.com, Walmart reignited its e-commerce ambitions. By using its vast network of locations as pick-up centers for online ordering, Walmart has shown it has a second lease on its retail life.

ALSO READ: Walmart Raises Its Outlook on U.S. Strength

While Wall Street has taken notice of Walmart’s effective strategy, shares are still in “fair-value” territory. The company has collected $17 billion in free cash flow over the past year but still trades for under 20 times that figure. While e-commerce might soften in a recession, the value proposition of Walmart’s low prices won’t. And all the while, investors can collect a safe and sustainable dividend -- currently yielding 1.9%.

Our final stock might be a bit of a surprise. For a long time, Grand Canyon Education (Nasdaq: LOPE) operated its namesake Grand Canyon University (GCU). But last year, GCU went back to being an independent non-profit, while the company (GCE) became an education service provider. That means GCE can take all of the software and expertise it accumulated in-house -- which allowed the company to not raise prices for its on campus students for over a decade -- and offer it up to others.

Grand Canyon doesn’t offer a dividend, and it’s tough to value the company as it makes its transition to a service company. That said, there’s a clear pattern that during recessions, more young adults head back to school. Because GCE gets a cut of tuition expenses at schools it partners with, that would raise the top line. Additionally, the company has announced that by the end of the year, it will announce partnerships with colleges in the Midwest and Northeast -- giving it more exposure to enrollment gains should the economy falter.

ALSO READ: 3 Stocks to Recession-Proof Your Portfolio

There’s no such thing as a free lunch. If you are investing in preparation for a recession, this applies to you. The stocks mentioned are well-positioned should a downturn soon hit. But with that safety comes downside -- these stocks are also not the type of growth stories that can produce market-beating, dynastic-wealth-generating returns either. That’s okay, especially if you have more modest goals. But it’s important to set your expectations ahead of time.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Brian Stoffel owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Grand Canyon Education. The Motley Fool recommends Johnson & Johnson, T-Mobile US, and Verizon Communications. The Motley Fool has a disclosure policy.