Earlier this month, the Office for National Statistics (ONS) officially declared the UK economy in recession. It marked the first time since the 2008-09 financial crisis that the UK economy had fallen into a year-long recession.
A recession is generally defined as two straight quarters of decline in the . Thus, when an economy contracts over a six-month period, it is in recession. As the economy struggles, and increases, businesses make fewer sales and a country’s economic output declines.
When we analyze the numbers released by the ONS for monthly growth in the , and industries, Britain’s second-quarter contraction was extremely steep. Although June numbers showed a rebound, the economy may not be out of the woods yet.
In investing, risk and return go together. Where there is a potential return, there is also a potential loss. Diversification is all about reducing risk. Although it won’t eliminate all the risk in an equity portfolio, an investor’s long-term risk-return ratio is likely to be more attractive.
Therefore, today we’re focusing on two shares that may help investors recession-proof their long-term portfolios.
Health Care Is Typically Recession-Proof
The current pandemic has reminded billions of people around the world of the importance of health and healthcare. FTSE 100 investors have access to a wide range of healthcare stocks. With an enviable drug pipeline, GlaxoSmithKline (LON:), (NYSE:) has the second-largest market cap on the UK index.
The healthcare giant is regularly in the news with its work on a potential vaccine against the coronavirus. In April, Sanofi (PA:), (NASDAQ:) and GSK agreed to collaborate to develop a vaccine for COVID-19. Mainly thanks to Shingrix, its shingles vaccine, GSK is the world’s largest vaccine manufacturer.
In late July, GSK announced robust . Group revenue came in at £7.6bn (US$10.0 billion) and pre-tax profits were £2.6bn (US$3.4 billion). The company reports income in three segments: pharmaceuticals, vaccines and consumer healthcare. Analysts noted that vaccine sales decreased by 27% in the quarter, mainly due to disruptions because of the pandemic. Therefore, market participants believe this decline will be a temporary hiccup. The group operating margin was 37.4% and free cash flow totalled £1.95bn (US$2.58 billion).
Although GSK shares have recovered considerably since the lows seen in March, year-to-date the stock is still down about 13%. Its forward P/E and P/S ratios are 13.04 and 2.23, respectively.
Finally, its current price supports a dividend yield of 5.15% in the UK. As the company makes quarterly dividend payments, the shares are expected to go ex-dividend in mid-November. We believe GlaxoSmithKline shares offer value for long-term portfolios, especially if the price were to decline below 1,500p (or toward the $39-level for US listed shares).
Relying On Utilities
Big utility companies score high on passive income investors’ watch lists. But in addition to the dividend income, utility shares may also help market participants weather an upcoming recession better. After all, we all need to use electricity, gas and water to continue our lives. As a result, demand for utilities is likely to remain relatively stable, even as consumer budgets may shrink in the weeks ahead.
This brings us to National Grid (LON:), (NYSE:). This multinational electricity and gas utility company owns and operates much of the UK’s gas and electricity infrastructure. The group also serves consumers in the northeastern U.S.
On June 18, it announced 2019/20. Operating profit was up 1% to £3.5 billion (US$4.63 billion). Management’s cost efficiency programs delivered around £100m (US$132 million) savings.
It is important to note that the numbers were for the full year ending March 31. Therefore, investors should keep an eye for future trading updates on the full effects of the pandemic and lockdown earlier in the year.
Yet, chief executive John Pettigrew sounded optimistic as he noted:
“Looking ahead, whilst COVID-19 will impact our financial performance in FY21, we expect this to be largely recoverable over future years and, therefore, anticipate no material economic impact on the group in the long-term.”
In case the “stay-at-home, work-from-home” trend continues in the coming months, there is likely to be increased demand for domestic electricity and gas. Thus, utility stocks, like NG, could be robust choices for including in long-term portfolios.
So far in the year, NG shares are down about 6%. However, that metric tells only half the story for 2020. Since early spring, NG stock is up about 11%. Its forward P/E and P/S ratios are 17.27 and 2.13, respectively.
With its dividend yield of 5.45% in the UK, we expect NG stock to remain a favourite among income-seeking investors. The shares are expected to go ex-dividend in the latter part of November. We’d look to buy the dips, especially if the price goes toward 850p (or toward the $55-level for US listed shares).