Recently, there’s been talk that the UK could be heading for a recession. It’s not hard to see why. Right now, many consumers are really feeling the pinch due to soaring energy and food prices. Meanwhile, the Russia-Ukraine crisis is impacting business confidence and spending.
If we do see a recession in the UK (and I think there’s a relatively high probability that we will), there will be winners and losers on the stock market. With that in mind, here’s a look at two ‘defensive’ stocks I’d want to own in a recession.
A sleep-well-at-night stock
The first stock I’d want to own for protection is Unilever (LSE: ULVR). It’s a FTSE 100 consumer goods company that owns a number of well-known brands, including Dove, Domestos, and Knorr.
One reason I’d back this stock in a recession is that the company manufactures everyday essentials such as soaps and deodorants, cleaning materials, and food products. These tend to be fairly recession-proof.
Another reason is that Unilever is a truly global company that operates in nearly 200 countries. So its prospects are not correlated to the state of the UK economy.
A third reason is that Unilever is a reliable dividend payer (with an attractive yield of around 4% right now). Generally speaking, these kinds of dividend stocks tend to hold up well during periods of market weakness.
Of course, like every stock, Unilever has its risks. The main one I’m monitoring here is higher costs. These could impact the group’s profits in the near term. Changing consumer tastes and preferences are another risk to consider.
However, I think the cost-related risks are probably factored into the share price right now. Unilever shares have had a decent pullback over the last six months and now sport a price-to-earnings ratio of just 17.
I see that as an attractive valuation, given the company’s defensive attributes and dividend track record.
Recession-proof products
Another stock I’d want in my portfolio if we have a recession is Reckitt (LSE: RKT). It’s a leading consumer goods company that has a focus on health, hygiene, and nutrition. Its brands include Nurofen, Gaviscon, and Stepsils.
Like Unilever, Reckitt is a global company that manufactures products that are relatively recession-proof. People are not going to stop buying Strepsils lozenges or Gaviscon heartburn tablets because there’s an economic downturn. This means its sales and profits should hold up well if UK economic conditions deteriorate.
Meanwhile, it’s a reliable dividend payer as well. At present, the yield on the stock is about 3%.
Reckitt’s valuation does add a little bit of risk. Currently, analysts expect the group to generate earnings per share of 299p for 2022. That puts the stock on a forward-looking P/E ratio of about 20 right now. If future growth is below expectations, the shares could experience some weakness. Higher costs are also an issue to monitor.
Overall however, I think RKT is a top stock to own in a recession. I’d expect the stock to outperform the wider UK market due to its defensive characteristics.