The recent failure of two U.S. lenders has led many analysts to believe that the Federal Reserve might opt for a softer stance on rate hikes. However, one must remember that the Fed wants to achieve its long-term inflation target, and higher interest rate hikes might return as soon as the banking sector crisis eases.
Given this scenario, I believe it could be wise to invest in defensive stocks McDonald's Corporation (MCD), Elevance Health, Inc. (ELV), and The Kroger Co. (KR). Based on the inelastic demand for their offerings, these companies can maintain their profit margins even if the economy witnesses a recession.
Before discussing the fundamentals of these stocks, let’s see what’s shaping up on the economic front.
The Federal Reserve looked set to hike the interest rates by 50 basis points at the next monetary policy meeting, given the recent spate of strong macroeconomic data with the annual inflation reading of 6% in February. In addition, the labor market remained resilient, with low unemployment rates and strong nonfarm payroll additions in February.
However, the recent failures of the Silicon Valley Bank and Signature Bank have rocked the financial system. The financial regulators had to act fast to restore depositors’ confidence in the banking system. In order to restore stability to the financial system, the central bank is likely to go forward with a smaller 25 basis point rate increase or no rate hike whatsoever.
In a note to clients, Bob Schwartz, senior economist at Oxford Economics, said, “We still expect the Fed to raise its policy rate by 25 basis points next week but also convey a less strident inflation-fighting message than thought a few weeks ago aimed at calming market anxiety.”
“The wildcard going forward will be the reaction in the financial markets, as maintaining financial stability is one of the mandates of the Fed,” he added.
Given this uncertainty, investing in MCD, ELV, and KR could help keep one’s portfolio stable and generate solid returns.
Let’s examine why MCD, ELV, and KR will likely stay afloat in a recession.
McDonald's Corporation (MCD)
Renowned fast-food franchise MCD operates and franchises McDonald’s restaurants. Its restaurants are known for their hamburgers and cheeseburgers, chicken sandwiches and nuggets, wraps, and fries, among other items.
On December 14, 2022, MCD and all five members of the restaurant chain's North American Logistics Council (NALC) signed agreements with Enel North America to purchase renewable energy and the associated renewable energy certificates (RECs) from Enel Green Power's Blue Jay solar project. This should help MCD achieve its sustainability goals.
SVP and Chief Supply Chain Officer, North America, at MCD, Bob Stewart, said, "Adding Blue Jay solar to our U.S. renewable energy portfolio is one of the many important steps in our journey to achieving our net zero aspirations. This deal is a unique example of how McDonald's and its logistics partners combine efforts to leverage their reach and scale to tackle supply chain emissions together."
Over the last three years, MCD’s dividend payouts have grown at a 6.4% CAGR. Its four-year average dividend yield is 2.26%, and its forward annual dividend of $6.08 per share translates to a 2.28% yield. It paid a quarterly dividend of $1.52 per share on March 15, 2023.
In terms of the trailing-12-month EBIT margin, MCD’s 44.62% is 472.6% higher than the 7.79% industry average. Its 56.97% trailing-12-month gross profit margin is 62.8% higher than the industry average of 35%. Likewise, its 22.75% trailing-12-month levered FCF margin is significantly higher than the industry average of 1.94%.
MCD's operating income for the fiscal fourth quarter that ended December 31, 2022, increased 7.7% year-over-year to $2.58 billion. Its non-GAAP net income increased 13.3% year-over-year to $1.90 billion. Additionally, non-GAAP EPS came in at $2.59, representing a 16.1% increase from the prior-year quarter.
Analysts expect MCD’s EPS for the quarter ending March 31, 2023, to increase 1.2% year-over-year to $2.31. Its revenue for the quarter ending June 30, 2023, is expected to increase 6.5% year-over-year to $6.09 billion. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 14% to close the last trading session at $267.20.
MCD’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the B-rated Restaurants industry, it is ranked #9 out of 46 stocks. MCD has an A grade for Quality and a B for Stability and Sentiment. To see the other ratings of MCD for Growth, Value, and Momentum, click here.
Elevance Health, Inc. (ELV)
ELV operates as a health benefits company. The company operates through four segments: Commercial & Specialty Business, Government Business, CarelonRx, and Other. It supports consumers, families, and communities across the entire care journey connecting to the care, support, and resources to lead healthier lives. It serves people through a medical, digital, pharmacy, behavioral, clinical, and care solutions portfolio.
On February 15, 2023, ELV announced that it had closed the acquisition of BioPlus. ELV’s Executive Vice President and President, Carelon, Pete Haytaian, said, “Specialty pharmacy is a critical driver of value for patients, and we are excited to welcome BioPlus, the largest independent specialty pharmacy, to our Elevance Health family.”
“Together, we will enhance our abilities to provide end-to-end pharmacy services for our consumers by delivering greater affordability and access to critical medications, as well as a superior patient experience,” he added.
Over the last three years, ELV’s dividend payouts have grown at a 16.7% CAGR. Its four-year average dividend yield is 1.12%, and its forward annual dividend of $5.92 per share translates to a 1.28% yield. It is expected to pay a quarterly dividend of $1.48 per share on March 24, 2023.
In terms of the trailing-12-month EBITDA margin, ELV’s 6.22% is 85.8% higher than the 3.35% industry average. Its 3.85% trailing-12-month net income margin compares to the negative 6.99% industry average. Likewise, its 1.56x trailing-12-month asset turnover ratio is 360.7% higher than the industry average of 0.34x.
For the fourth quarter ended December 31, 2022, ELV’s total operating revenue increased 10.1% year-over-year to $39.67 billion. Its total operating gain increased 15.2% over the prior-year quarter to $1.37 billion. The company’s adjusted shareholders’ net income came in at $1.26 billion. In addition, its adjusted shareholders’ net income per share came in at $5.23, representing an increase of 1.8% year-over-year.
For the quarter ending March 31, 2023, ELV’s EPS and revenue are expected to increase 13.1% and 8% year-over-year to $9.33 and $40.92 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past nine months, it has gained 4.2% to close the last trading session at $463.17.
ELV’s POWR Ratings reflect solid prospects. The company has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has a B grade for Value, Stability, and Quality. ELV is ranked first out of 10 stocks in the A-rated Medical – Health Insurance industry. To see the other ratings of ELV for Growth, Momentum, and Sentiment, click here.
The Kroger Co. (KR)
KR operates combination food and drug stores, multi-department stores, marketplace stores, and price impact warehouses. Its combination food and drug stores offer natural food, organic sections, pharmacies, general merchandise, and pet centers, and multi-department stores provide apparel, home fashion, furnishings, electronics, and toys.
On December 16, 2022, KR’s healthcare division Kroger Health and its Family of Pharmacies and Prime Therapeutics LLC announced a direct agreement for the Kroger Family of Pharmacies to remain in-network effective January 1, 2023. This direct agreement will make Medicare more accessible and benefit its customers.
Over the last three years, KR’s dividend payouts have grown at a 16.9% CAGR. Its four-year average dividend yield is 1.99%, and its forward annual dividend of $1.04 per share translates to a 2.22% yield on the current price. It is expected to pay a quarterly dividend of $0.26 per share on June 1, 2023.
In terms of the trailing-12-month Return on Common Equity, KR’s 23.06% is 119.9% higher than the 10.48% industry average. Its 4.53% trailing-12-month Return on Total Assets is 14.6% higher than the industry average of 3.95%. Likewise, its 3.01x trailing-12-month asset turnover ratio is 253.1% higher than the industry average of 0.85x.
KR’s sales for the fiscal year ended January 28, 2023, increased 7.5% year-over-year to $148.26 billion. Its operating profit increased 18.7% over the prior-year quarter to $4.13 billion. The company’s adjusted EBITDA rose 12.5% year-over-year. Its net earnings attributable to KR increased 35.6% year-over-year to $2.24 billion. In addition, its EPS came in at $3.06, representing an increase of 41% year-over-year.
Analysts expect KR’s revenue for the quarter ending April 2023 to increase 1.3% year-over-year to $45.17 billion. Its EPS for the quarter ending July 2023 is expected to increase 3.8% year-over-year to $0.93. It surpassed Street EPS estimates in each of the trailing four quarters. Over the past month, the stock has gained 6.3% to close the last trading session at $46.78.
KR’s promising prospects are reflected in its POWR Ratings. The company has an overall rating of B, which translates to a Buy in our proprietary rating system.
Within the A-rated Grocery/Big Box Retailers industry, it is ranked #9 out of 37 stocks. It has a B grade for Value and Quality. To see the other ratings of KR for Growth, Momentum, Stability, and Sentiment, click here.
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MCD shares were trading at $269.59 per share on Monday morning, up $2.39 (+0.89%). Year-to-date, MCD has gained 2.89%, versus a 2.82% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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