With inflation hovering around its four-decade peak in June last year, the Federal Reserve is committed to returning inflation to its 2% target. During its December meeting, the Fed raised its federal fund's rate target to 4.25%-4.5%. Moreover, policymakers predict that interest rates will remain high for longer, and the terminal rate to reach as high as 5.1% this year.
Since a series of the Fed’s aggressive rate hikes are adding fuel to a stagnating economy, the likelihood of a U.S. recession has jumped to 70%, according to economists surveyed by Bloomberg. The survey showed that the recession probability has increased from 65% in November and more than doubled over the past six months.
“The U.S. economy is facing big headwinds from surging interest rates, high inflation, the end of fiscal stimulus, and weak export markets abroad. Businesses have turned cautious about adding to inventories and hiring, and will likely delay construction and other capex plans with credit more expensive and order books shrinking,” Comerica Bank chief economist Bill Adams told Bloomberg.
Moreover, Barclays PLC (BCS) believes that 2023 will be one of the worst years for the global economy in forty years. Also, Ned Davis Research Inc. placed the odds of a severe global downturn at 65%.
Given the backdrop, quality stocks UnitedHealth Group Incorporated (UNH) and PepsiCo, Inc. (PEP) could help investors counter a recession due to their robust fundamentals and solid dividend-paying record.
UnitedHealth Group Incorporated (UNH)
UNH is a diverse healthcare corporation in the United States. It operates in four segments: UnitedHealthcare; OptumHealth; OptumInsight; and OptumRx. It provides consumer-focused health benefit plans and services, access to networks of expert healthcare providers, and pharmacy care services and initiatives.
On January 5, 2023, Optum, a UNH subsidiary, and Northern Light Health announced a strategic partnership to improve the healthcare system's patient and provider experiences in Maine. Beginning in March 2023, about 1,400 Northern Light Health employees are set to transition to Optum. UNH could benefit significantly from this partnership.
On October 27, 2022, UnitedHealthcare, another UNH subsidiary, introduced its 2023 individual and family plans on the health insurance marketplace. These plans will be available in 22 states and offer low-cost coverage, a variety of benefits, and a straightforward customer service process.
Individual and family plans are crucial in expanding access to insurance because they offer reasonable benefits, and many people might qualify for plans with monthly premiums as low as $0. These can aid the business in growing and attracting new customers.
For the fiscal 2022 third quarter ended September 30, 2022, UNH’s total revenues increased 11.8% year-over-year to $80.89 billion, while its earnings from operations grew 30.6% from the year-ago value to $7.46 billion. The company’s net earnings rose to $5.38 billion, a 28.5% increase year-over-year, and its adjusted EPS stood at $5.97, a 28.1% increase from the prior year’s period.
The company has raised its dividends for 13 consecutive years. It pays a $6.60 per share dividend annually, which translates to a 1.35% yield on the current price. UNH’s dividend payments have grown at a CAGR of 17.4% over the past five years, and its four-year average dividend yield is 1.36%.
The consensus EPS estimate of $22.03 for the fiscal year ended December 2022 indicates a 15.9% year-over-year improvement. Likewise, the consensus revenue estimate of $323.93 billion for the same year indicates a rise of 12.6% from the previous year. Moreover, UNH surpassed the consensus EPS estimates in all four trailing quarters, which is impressive.
In addition, the consensus EPS and revenue estimate of $24.95 and $355.83 billion for the current fiscal year (ending December 2023) indicate a 13.2% and 9.9% year-over-year improvement, respectively. Shares of UNH have gained 4.3% over the past year to close the last trading session at $490.
UNH’s POWR Ratings reflect its promising outlook. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has an A grade for Sentiment and a B for Quality, Growth, and Stability. Within the Medical - Health Insurance industry, it is ranked #2 of 11 stocks.
Click here to see additional ratings of UNH for Value and Momentum.
PepsiCo, Inc. (PEP)
PEP is a manufacturer and seller of a variety of convenient foods and beverages all over the world. It operates in seven segments, Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East, and South Asia; Asia Pacific, Australia and New Zealand, and China Region.
On December 14, Doritos, a subsidiary of PEP, launched Doritos After DarK™, a late-night dining concept serving upgraded, internationally-influenced snacks. With 43% of customers and 49% of Gen Zers claiming that snacking is most satisfying after dark, according to Frito-recent Lay's Snack Index1, this product should allow the company to expand its clientele and boost its revenue stream.
On November 1, Frito-Lay®, another PEP subsidiary, launched new bite-sized versions of iconic Doritos®, Cheetos®, and SunChips® flavors. Due to the limited number of other canister options, the brand's new product line has increased the variety and flavor possibilities in the snack aisle, which might be favorable to PEP.
For the fiscal 2022 third quarter ended September 3, 2022, PEP’s net revenue increased 8.8% year-over-year to $21.97 billion, and its gross profit grew 8% year-over-year to $11.66 billion. The company’s operating profit rose 6.1% from the prior year’s quarter to $3.35 billion.
In addition, PEP’s net income rose to $2.72 billion, a 21.4% increase year-over-year, and its EPS stood at $1.95, a 21.9% increase from the year-ago value.
PEP has raised its dividends for 50 consecutive years. It pays a $4.60 per share dividend annually, which translates to a 2.54% yield on the current price. The company’s dividend payments have grown at a CAGR of 7.4% over the past five years, and its four-year average dividend yield is 2.78%.
Analysts expect the company’s EPS and revenue for the current fiscal year (ending December 2023) to increase 7.6% and 3.3% year-over-year to $7.29 and $87.76 billion, respectively. Moreover, PEP surpassed the consensus EPS estimates in each of the four trailing quarters.
The stock has gained 6.1% over the past six months to close the last trading session at $181.10.
PEP’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system.
The stock has an A grade for Quality and a B for Growth, Sentiment, and Stability. Within the Beverages industry, it is ranked #9 of 35 stocks.
Beyond what we stated above, we also have PEP’s ratings for Value and Momentum. Get all PEP ratings here.
UNH shares rose $1.90 (+0.39%) in premarket trading Monday. Year-to-date, UNH has declined -7.58%, versus a 1.48% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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