5 Shares For A Broken Economy

Published in Investing on 29 September 2011

These companies should stand up well in a recession.

Many commentators are saying a double-dip recession in the developed world is increasingly likely, and just how severe it could be depends only how the eurozone debt crisis plays out. If you ask me, I think it's a racing certainty there will be more economic pain to come.

If there is further trouble ahead, then the question is, how should you, as an investor, position yourself? Well, today I present five household names that I think should stand up well during a recession.


Unilever (LSE: ULVR) is a multinational that makes a wide range of branded consumer goods. Its brands include Lynx deodorants, Ben & Jerry's ice cream, Flora margarine, Hellmann's mayonnaise and Persil washing powder -- basically a roll call of some of the most famous and popular products in the supermarket.

This is a venerable company -- it was formed way back in 1930 following the merger of Margarine Unie and Lever Brothers.

It tends to buy businesses with valuable brands, develop the brands through its slick R&D and marketing operations, and strip out costs ruthlessly.

This is a classic defensive play, and a bet that consumers will continue to buy branded consumer goods, recession or no recession.

At its current price of £20, Unilever is on a trailing P/E ratio of 15, which is about par for fast-moving consumer goods companies of its ilk, and there is a solid 4.2% dividend yield as well.


To my mind, the clever thing about Tesco (LSE: TSCO) is that it covers all the bases. It provides branded goods and its 'Finest' range for premium customers, standard Tesco products for middle-of-the-road customers, and its 'Value' range for customers on tight budgets.

The firm uses its massive purchasing power to drive down prices and provide an array of deals. And its Clubcard loyalty-card scheme pulls in more customers in a carefully targeted way. Plus it continues to expand into more and more areas, such as banking, flat-screen TVs and iPads.

What's more, as expansion opportunities dwindle in the UK, the company is taking its highly successful model overseas, giving Tesco more scope for growth.

Warren Buffett has recently added to his holding, too, and I think the recent price war the supermarket has started is well timed, building up its low-cost credentials at a moment when customers are becoming more and more value conscious.

This is another highly defensive play. No matter how bad the economy gets, people will still be shopping in Tesco.

The company's share price currently stands at 381p, giving it a trailing P/E ratio of 11.5 and a forecast dividend yield of 4.2%.


The pharmaceutical sector is unloved, but also enjoys strong defensive qualities. Even in a downturn, healthcare spending is likely to hold up well.

GlaxoSmithKline (LSE: GSK) is not as cheap as its peer AstraZeneca (LSE: AZN), but it has a much more impressive treatment pipeline, and a large part of its business is in the less volatile consumer healthcare sector, with famous brands such as Beechams, Aquafresh and Nicorette.

With the world's population becoming both older and wealthier, particularly in emerging markets, healthcare expenditure should continue to increase.

GlaxoSmithKline's share price is 1,348p, the trailing P/E ratio is 11.5 and the dividend yield is a juicy 4.7%.

Imperial Tobacco

Tobacco is another sector that is highly defensive. Most smokers are not going to give up their habit just because the economy is in recession. And as the number of emerging-market consumers of tobacco continues to increase, there are substantial growth opportunities.

Imperial Tobacco (LSE: IMT) owns brands such as West, Lambert & Butler and Gauloises. It has substantial market shares in countries such as the UK, France and Germany, and emerging markets such as Eastern Europe and Asia-Pacific.

Like the other companies on this list, Imperial Tobacco has strong fundamentals, resilient earnings and the potential for consistent dividend growth.

The company's shares are priced at 2,161p, putting them on a trailing P/E ratio of 12.6. The dividend yield is 4.5%.


After selecting four classic defensive shares, I thought I'd choose something a little different for my fifth pick.

I have plumped for Next (LSE: NXT). Yes, believe it or not, I have gone for a business in the downtrodden high-street retail sector. But did you know that since the onset of the slump in August, this share has out-performed just about every other member of the FTSE 100?

Next, of all the established high-street names, displays the greatest solidity and resilience. Revenue and profits have risen every year in the past five years apart from 2009.

The story of the high street in recent years has been one of slow decline, but Next has bucked the trend. Plus, it has a larger online offering than its competitors, with the hugely successful Next Directory.

I, personally, am a fan, and have probably bought a greater value of goods online through Next than any other company. If the gradual drift to online shopping continues, I think this retailer's profits will benefit.

Despite a recent rise, Next shares still look cheap: at the current price of 2,605p, it is on a trailing P/E ratio of 11, with a dividend yield of 3.3%.

More from Prabhat Sakya:

> Prabhat owns shares in Tesco. The Motley Fool owns shares in GlaxoSmithKline, Tesco and Unilever.

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F958B 29 Sep 2011 , 11:09am

I'd be happy with a portfolio comprising just those five, which I would expect to outperform the FTSE - especially once the lower volatility of defensive shares is taken into consideration.

While they aren't likely to give investors a doubling within a couple of years, they should deliver good, steady returns for patient buy-and-hold investors.
I'd estimate the above five shares' very-long-term, average annual "total returns" (i.e. including dividends) to amount to a very respectable 10-12% (or about 7-9% after inflation).

BarrenFluffit 29 Sep 2011 , 11:39am

Imperial Tobacco on one hand and Nicorette on the other! Plus if the latter doesn't work other pharmaceuticals to treat the damage. Neat

BarrenFluffit 29 Sep 2011 , 11:42am

Re Tesco, yes people still shop but they have a lot of capital and overhead in the business so profitability is sensitive to margins and turnover. Things can change.
(As Sainsbury's found)

ps200 29 Sep 2011 , 1:31pm


Well spotted! I guess Imperial Tobacco and Nicorette is the classic hedge! ;o)

RobinnBanks 12 Oct 2011 , 1:33pm

And Benson and Hedges, of course!

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