Johnson & Johnson or UnitedHealth: Which Inventory Is Extra Recession Proof?

The definition of a recession could differ, however one customary is when gross home product (GDP) falls for 2 consecutive quarters. This yr, it fell within the second quarter, so the likelihood exists that we could already be headed towards a recession.

Buyers must know learn how to defend their investments when a recession begins as a result of it usually means much less shopper spending, and that usually results in much less income for corporations. Recessions differ, and there is not any such factor as a “recession-proof” inventory. However sure sectors are extra recession-resistant, equivalent to shopper staples and healthcare. That is as a result of each sectors contain much less discretionary spending than journey, eating, or leisure.

That brings us to 2 enormous healthcare shares buyers usually take a look at as secure havens in instances of financial uncertainty: Johnson & Johnson (JNJ 1.07%) and UnitedHealth Group (UNH 1.49%).

1. J&J has stood the check of time

Johnson & Johnson is a large healthcare firm with 142,000 staff. It reported $24.3 billion in income within the second quarter, up 3%, yr over yr. To date this yr, J&J inventory is down about 7%, whereas the S&P 500 Index has slumped 25%.

Through the Nice Recession from December 2007 to June 2009, the S&P 500 Index skilled a complete return of -41.5% versus -12.5% for Johnson & Johnson. Why did it maintain up so nicely? Chalk it as much as one awkward phrase — “diversified inelastic spending.”

Johnson & Johnson makes numerous merchandise, medicine, and medical gadgets, however excluding just a few magnificence merchandise, a lot of what the corporate makes is not precisely discretionary spending.

JNJ Revenue (Quarterly) Chart

Knowledge Supply: JNJ Income (Quarterly) knowledge by YCharts

The corporate operates in three segments: prescription drugs, such because the medicine individuals take on daily basis to protect their well being; shopper healthcare, which incorporates staples equivalent to Band-Aids, Tylenol, and Zyrtec to deal with allergy symptoms; and medtech, which incorporates issues equivalent to synthetic hips, knees, and medical gear equivalent to sutures and hemostats.

Through the years from 2007 to 2009, Johnson & Johnson’s earnings per share (EPS) went up 18.29%, in distinction to numerous different corporations.

There’s one other issue why buyers did not go away the corporate in the course of the Nice Recession — the corporate is a Dividend King that has raised its payout for 60 consecutive years, together with a 6.6% increase this yr to $1.13 per quarterly share, giving it a yield of round 2.78%. That dividend offers buyers slightly extra persistence to carry on to a inventory that declines as a result of they’ll rely on a dividend within the meantime.

Johnson & Johnson is within the strategy of spinning off its least-profitable division, shopper well being, and plans to have that completed by someday in 2023. Whereas this leaves the corporate with much less range, it additionally improves the corporate’s revenue margins. For instance, within the second quarter, shopper well being income was down 1.3%, year-over-year, whereas pharmaceutical was up 6.7% and medtech was down 1.1%.

2. UnitedHealth is using a pattern

UnitedHealth Group, a medical health insurance and managed healthcare firm, has been up greater than 3% to this point this yr. It is even larger than Johnson & Johnson, with 360,000 staff, and it’s the largest well being insurer within the nation, serving 280,000 individuals within the second quarter.

For probably the most half, medical health insurance is not one thing individuals can afford to go with out, making it considerably recession-proof. Nevertheless, when a recession hits laborious sufficient that individuals lose their jobs, they lose their medical health insurance as nicely. Through the Nice Recession, the corporate’s whole return stage fell by 53%.

UNH Chart Knowledge Supply: UNH knowledge by YCharts

Thankfully, a larger a part of UnitedHealth’s enterprise is now with Medicare and Medicare Benefit prospects who’re now not on an organization’s insurance coverage plan.

Within the second quarter, UnitedHealth reported $80.3 billion in income, up 13% yr over yr. Its Optum managed healthcare division and its UnitedHealthcare insurance coverage division each confirmed double-digit beneficial properties in income. The corporate additionally reported EPS of $5.34, in comparison with $4.46 in the identical interval final yr.

The corporate additionally raised its quarterly dividend by 13.7% to $1.65 per share this yr, giving its dividend a yield of round 1.27%. Whereas UnitedHealth is not a Dividend Aristocrat, it has grown its dividend by 676% over the previous decade and has raised its dividend for 14 consecutive years.

The corporate also needs to profit from a 10-year collaboration it just lately introduced with Walmart to supply healthcare to seniors and Medicare beneficiaries, in addition to digital take care of sufferers of all ages. The settlement will start with 15 Walmart places in Florida and Georgia earlier than increasing into new markets.

Not a troublesome selection

UnitedHealth has come a good distance and seems extra recession-proof than it was, because of its elevated Optum enterprise and larger emphasis on Medicare prospects. But, regardless of its run this yr, it’s a riskier wager if we’re heading right into a recession.

Proper now, Johnson & Johnson nonetheless appears the safer selection of the 2 shares, particularly as a hedge in opposition to a recession, based mostly on the way it dealt with the Nice Recession together with its extra beneficiant dividend.

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