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What’s up guys!
How’s your week going, year end is fast approaching GO GO GO!
Haha, feels a bit like that doesn’t it?
It’s Tom from www.investmentbasecamp.com
Tom writes about investing, personal finance and building your retirement portfolio. He’s not sure why, but people seem to think he makes sense when he talks about investing and personal finance (haha, good one Tom!)
His Quora answers in finance and investing received over 180,000 views in the past month alone (wow)!
Tom currently works in the Investment Consulting industry advising pension and 401k plans, worth over a collective $5B dollars in assets which means that I, for one, am darn excited to read this post.
So without further ado… take it away TOM!
We are nearing the end of the longest bull market in history. It’s time to start thinking about what to do in a bear market.
No one can tell you when the party will end but most reasonable estimates say within the next two years. So what specific stocks should you start thinking about as the market turns down?
AT&T has been around through thick and thin for over 100 years. They recently took on a mountain of debt to make some purchases. This doesn’t sound like a good stock to own if the economy is headed for a downturn right?
Wait, let’s take a step back.
Most of that debt (85%) is on a fixed rate, that’s good. As rates are anticipated to rise and others pay a higher rate, they are paying a lower rate.
Almost all of it is due within the next 2 years, that’s pretty good! Short term debt won’t fluctuate as much as something due years from now (as long as the recession can hold off until then).
80% of the debt is US based, also good – the U.S. is safer and more predictable than emerging and developing markets.
Hm, so its “good debt”, but can they pay it?! I mean it is $180B in debt.
With an average $12 billion in cash flow from operations a quarter (~almost $50B a year), I would think so. That average has only shot up the last two years.
If the debt isn’t an issue what about the company itself and its performance in down markets?
AT&T actually moves inversely with risky bond prices. The stock seems to be a safe haven type investment.
Also at a 6-7% current dividend yield you are getting compensated for holding a stock that moves inversely with risky assets.
Not to mention AT&T is investing in growing segments (Hulu and Directv Now) to complement its traditional mobile phone business and you have a company that will be bringing in revenue in any storm.
AT&T has about a negative 16% return YTD with dividends reinvested. The stock was hurt badly by skepticism around their merger and growing level of debt.
Exxon is another company that has been around for over 100 years. It has a low beta (three-year beta: 0.9 (10% less volatile than S&P 500)).
Beta is a measure of a stocks volatility as compared to the overall market, generally the lower the safer because of the diversification benefits that investment would provide.
Exxon also has a strong credit rating (S&P Credit Rating: AA+), and consistent and growing dividend (35 year growth steak and 6% projected long term growth rate).
But wait I know what you’re thinking.
During recessions oil prices crash and oil company revenue, earnings and cash flow are naturally volatile. However, Exxon has managed to mitigate these risk because of:
- Diversification: While the oil & gas producing segment is indeed highly volatile, the refining and specialty chemical businesses tend to benefit from lower oil prices, due to lower input costs driving up margins.
- Strong balance sheet (below).
|Company||Debt/EBITDA||Interest Coverage Ratio||Debt/Capital||S&P Credit Rating||Average Debt Cost|
- Management: The team is currently led by 27-year company veteran Darren Woods. Woods recently outlined the industry’s most ambitious growth plan, which calls for average growth capex spending of $30 billion between 2020 and 2025. That’s compared to just $19 billion during the oil crash. Management plans to increase production from 4 million to 5 million barrels, increase chemical production by 30% and achieve 20%, 20%, and 15% ROIC (return on invested capital) on production, refining, and chemicals respectively.
- That may seem ambitious but Exxon plans to continue being highly disciplined with its spending, which is why it expects that, even at just $60 oil, it will be able to achieve 15% returns on capital, which is more than double the 7% it achieved in 2017. Returns on capital are a good proxy for quality management and historically Exxon has had the best ROC in the industry.
Overall Exxon is a great company that produces a huge amount of free cash flow in all periods. Even accounting for Exxon’s 6% to 7% long-term dividend growth rate, by 2025 the company should be retaining $20 billion in cash each year, which can be used to either pay off all its debt, buyback lots of shares or diversify into renewable energy to prepare for a post-oil future.
Even during the GFC, Exxon shares fell from its peak by just 28%, outperforming the S&P 500 by an impressive 51%. Given that the next recession is likely to be far milder, Exxon “should” be a good defensive choice for high-yield investors.
Exxon has about a negative 7% return YTD with dividends reinvested. This recent downturn might make it a good opportunity.
Realty Income (O)
And finally, here’s the best for last.
Realty Income is “The monthly dividend company”. It literally pays dividends every month.
Realty income has paid dividends and raised dividends for over 23 straight years.
The company is diversified across 47 states with occupancy rates never falling below 96% even in the great recession.
Diving deeper into realty income’s asset, they own a ton of convenience stores which have proven to be recession proof and most importantly – internet / Amazon proof.
Oh and the company currently pays a 4-5% dividend yield. While those dividends and dividend raises may seem trivial, they aren’t. Especially when you keep compounding through recessions. More on how to retire early with these types of stocks here .
Realty Income has about a 22% return YTD with dividends reinvested.
What are your favorite stocks for a recession? Leave yours in the comments below.
Wow, very educational post Tom! I learnt a bucketload there, how about you?
I find it fascinating to see different points of view when it comes to investing, but remember guys – all investing has risks.
Even though Tom was kind enough to share his insights, always, always do your own research! Never ever just rely on anyone else’s. After all it’s your money at the end of the day!
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P.S.S. I stress again the necessity for your own research when making investment choices – don’t just rely on other’s opinions, no matter how good they are!