Interactive Investor

Two stocks to keep your portfolio clean and healthy in a downturn

13th July 2022 09:23

Rodney Hobson from interactive investor

For investors worried about the state of the global economy, our overseas investing expert goes defensive with this pair of household names.

Although the US economy is holding up better than many commentators expected – the latest jobs figures beat expectations – it seems sensible to have some defensive stocks in any portfolio in these uncertain times. One company that should hold up well in any downturn is leading consumer products supplier Colgate-Palmolive Co (NYSE:CL).

The Colgate half is most associated with toothpaste – it is by far the best-selling brand in the world – and the Palmolive half is synonymous with soap. However, the group has a much wider range of products that also includes shampoos, shower gels and deodorants. It is even a leader in pet foods.

Most of its products are in the top two global brands in their given field and sales are spread across 200 countries, which gives some protection in the event of recession. This was one of few sectors where sales have held up well throughout the pandemic.

These are the kind of products that people will continue to buy even when they are strapped for cash. Indeed, in the first quarter of this year organic sales rose 4% compared with the same period last year.

It is highly likely that US interest rates will continue to rise sharply, dampening the economy there, but the impact on Colgate-Palmolive sales should be limited to some modest switching to cheaper and potentially inferior alternatives. In any case, sales outside the US account for 70% of revenue, and the company is particularly strong in emerging markets where the demand for quality is likely to hold up among the aspiring population.

The shares have gone broadly sideways over the past two years, ranging between $72 and $86 and now settling around $78. This should be seen as a solid, rather boring company that will not deliver spectacular growth but one that will continue to make progress

Source: interactive investor. Past performance is not a guide to future performance.

With a price/earnings (PE) ratio of 32.7, the shares are not especially cheap but the yield of 2.3% is reasonably attractive for a company of this quality with a consistent record of rewarding shareholders.

The dividend has been maintained or, more often, increased every year for nearly 60 years, a remarkable record that few companies can match, and it currently stands at 47 cents each quarter after yet another uplift last month. Investors who buy before 21 July will qualify for the next payout on 15 August, which is not long to wait.

An alternative is consumer products manufacturer Procter & Gamble Co (NYSE:PG) which is now looking very attractive after slipping back from a recent peak of around $162 to $145. The current level was a ceiling on the way up and is likely to provide a solid floor.

P&G has similar qualities to Colgate: quality leading brands in lines that should prove reasonably immune to recession. It is best known for Tide washing powder, Pantene shampoo, Charmin toilet rolls and Pampers nappies, but it has plenty more successful lines that generate just over half of total sales outside the US, again particularly in emerging markets.

The PE is 25.53, slightly less challenging than Colgate’s, and the yield is similar at 2.4%.

Source: interactive investor. Past performance is not a guide to future performance.

Hobson’s choice: Several analysts believe that a fair value for Colgate shares is $90, but that looks wildly optimistic at this stage. Nonetheless, the shares are a clear buy below $80. The downside looks limited to $76. In the unlikely event that this floor is reached, the buy stance becomes really compelling.

I suggested in April that P&G shares were fully valued at just over $160, and I stand by my view that existing shareholders hang on. I believe that level will be reached again soon. Meanwhile, the shares are once again worth a buy recommendation.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

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