If you believe that there is a possibility that the U.S. may be heading toward a double dip recession in 2012, as so many other investors also believe, then the time is ripe to look into a recession proof stock before that dreaded double dip recession actually occurs, giving you a head start before other investors push up the price of the stocks you have settled on.
Depending on your risk tolerance level, there two strategies that can be followed:
- Become aggressive: This stance requires a higher level of risk tolerance when the risk/reward ratio is considered.Just as there is a top to a bull market, there also is a bottom to a bear market. Pick the correct recession proof stock and you will reap the rewards when the economy finally turns around.
- Be defensive: This approach is more appropriate for those investors who believe that hard times will last much longer than anticipated. Double digit returns may not surface; however, losses will most likely be limited. Decisive factors should be: low debt, history of steady growth and solid earnings, and low P/E ratio. Even if the stock prices experience temporary dips, avoid selling at a loss unless absolutely necessary.
To that end, here is a short list of frequently mentioned stocks that have the potential of being a suitable recession proof and where downside is limited:
- Coca Cola: Fitch Ratings has rated A+ the company’s upcoming issuance of notes maturing in two, three and six years with a face value of $2.75 Billion, reflecting the company’s strong cash balance position of $14 Billion, along with operating income that is expected to grow in the low to mid single digit range in 2012. Although this operating income prediction is on the low side, any company that has the capability of weathering the recession and still grow will most likely achieve a much faster growth rate once the economy picks up. As of December 31, 2011, debt to EBITDA was 2.2, with interest coverage standing at 25.6. Dividends have also been increased for the past 49 years, with dividend yield in the 2.7% range.
- Wal-Mart: Considered a countercyclical stock, Wal-Mart has a ferocious competitive advantage in that whatever you sell, Wal-Mart can do it cheaper. Dividends have increased annually for the last 33 years. The international division is furthermore expected to grow at a 20% rate for the foreseeable future.
- Colgate Palmolive: The Board of Directors of Colgate Palmolive announced in March 2012 a 7% increase in the company’s quarterly dividend to $0.62 per share, for an annualized $2.48 dividend. Dividends have been paid on a continuous basis since 1895. The company is projecting a double digit growth rate for 2012.
- Altria Group: The 6.30% dividend yield is the highest among the company’s competitors. Ranked the best performer on the S & P 500 for an astounding 50 years (1957-2007), this company is still ranked among the top performers on the S & P 500 for the past several years.
- McDonald’s Corp: In 2011, McDonald’s Corp. produced a 48% capital gain, due largely to a 10% increase in revenues to $6.82 Billion, with a 87% dividend increase since 2007 and the annualized total return of the stock for the past ten years stands at 13.80%. Net income for the first quarter of 2012 increased by 4% to $1.27 Billion, and the company is expecting further growth in the next several quarters. The dividend yield is currently 2.80%.
These stocks have all managed to produce satisfactory results since the 2008 crisis, and are indicative of being a recession proof. To add icing on the cake, their dividend yields outperform the interest rate on U.S. Treasury Notes.