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I think Unilever shares belong in a recession-proof portfolio

Tezcan Gecgil, PhD
Supermarket aisle with empty green trolley

We are almost at the tail end of nearly a decade of economic growth and although there have been a few short-lived downturns over the past 10 years, most economies have enjoyed stable growth since the crisis of 2008/09.

We will not know when the next recession has exactly started until we are in it, but we know the economy (and investors’ sentiment) can change rather quickly. 

The yield curve inverts yet again

Earlier in the month, UK and global equity markets went into a tailspin when the US Treasury yield curve briefly inverted as short-term yields traded above those of the long-term variety, something that is seen to signal an approaching recession.

In late March, a similar yield curve inversion spooked the investing world, yet equities continued to perform well in April. Turbulence hit in May, to be followed by an up-leg in most of June and July. Now in August, experts are again sounding the warning for a potential recession. 

If you think an economic slump may be almost upon us, you may want to reconsider your portfolio diversification strategy as certain industries and stocks tend to do better in times of slower economic growth.

A resilient industry

Exactly what traits are common to defensive stocks? A defensive company typically has a constant demand for its products or services and isn’t correlated to the rest of the business cycle.

Consumer staples companies are usually considered to be defensive. People are likely to continue to buy household items, cleaning products, and other essentials such as personal hygiene products, even when their salaries are shrinking.

One stock that may be worthy of your attention is FTSE 100 consumer products giant Unilever (LSE: ULVR).

Diversified portfolio and stable returns

Unilever managed to weather the recession of 2008/09 quite well, in part due to its growing exposure to the developing world. Now its revenues coming from emerging markets are over 50% of its total. And its trading statement for 2019’s first half showed that emerging markets’ underlying sales grew 6.2%, as volumes and prices rose.

The group’s operating margins also improved to 17.6% and management’s aim for 2020 is to reach 20%.

Unilever owns over 400 brands and operates in three segments: personal care, homecare, and foods and refreshment.  On a given day, the average British (and global) household is likely to use many of its brands, including Lipton, Knorr, Marmite, Magnum, Wall’s, Cif, Dove, and Vaseline.

An estimated 2.5bn people use its products daily with a number of its brands generating more than £1bn in annual sales individually. Its established global distribution chain and its marketing muscle contribute to the impressive metrics.

This defensive stock is liked by investors as a reliable dividend payer. Within the past year, Unilever generated over £5.5bn in free cash flow and this increasing cash stream is likely to encourage the group to raise dividends in the future. 

One point to remember is how the Brexit situation is causing concern in the stock markets. Therefore, there might be short-term volatility in the share price as we approach 31 October. However, investors may regard any dip in the price as opportunity to buy into Unilever.

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tezcang has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019