The market volatility and economic circumstances have "muddied the waters" between investors and companies -- as companies continue to pull 2020 guidance off the table. Choosing companies to invest while uncertainties are high can be difficult, however, investors choosing healthy, recession resilient business models greatly increases the probability of success in the long-term.
Here are three businesses that have proven successful during the Great Recession of 2008, and will continue to weather the challenging environment brought on from the coronavirus pandemic.
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McDonald's
McDonald's (MCD 0.78%) share price performance during the Great Recession of 2008 increased by 18.7% between January 2007 and the market low on March 9, 2009. Comparing this to the S&P 500's decline of 49% -- McDonald's had a 67.7 percentage point gain.
So far, McDonald's share price has declined 6.88% year to date in comparison to the S&P 500's decline of 12.08%, however, which is impressive as the pandemic has specifically struck the restaurant industry. The pandemic has forced the company to suspend the share repurchase program and raise $6.5 billion during the first quarter of 2020 while reducing capital expenditures by $1 billion in 2020. McDonald's pulled the 2020 guidance off the table and is awaiting the pandemic to unfold before specifying any further projections, however, there is still good reason to consider McDonald's in your portfolio.
McDonald's dividend has been growing for 43 years with a forward dividend yield of 2.72% and a three-year compound annual growth rate (CAGR) of 9.42%. McDonald's debt to EBITDA (the number of years for a company to pay debts) of 4.37 is above four which raises concern, however, the interest coverage of 7.92 is manageable as the company generates 70% of revenue from the drive-thru, which is still in operation. Profitability has been steadily improving with an operating profit margin of 28.9% in 2015 to 42.2% in 2019 -- a 7.87% CAGR over five years.
The share price of McDonald's is trading at a forward price to earnings of 29.69 which in combination with a forward price to sales of 7.56 shows that the market is highly optimistic the company can weather the pandemic in the long-term, continually improving profitability and generating significant free cash flows ($5.7 billion in 2019). Historically, holding McDonald's during a recession has proven successful, which continues to be the case during this recession.
Dollar Tree
Operating under a discount business model, Dollar Tree (DLTR -4.07%) has over 15,000 locations within North America and Canada. Struggling to keep store shelves stocked during the Coronavirus pandemic, Dollar Tree CEO Gary Philbin stated that "our stores experienced an unprecedented spike in demand in March" which is excellent news for the company. The near-term has forced Dollar Tree to hire an additional 25,000 employees to help with the increase in traffic, which gives multiple reasons to own Dollar Tree in any recession.
To survive during the recession, the company has a $1.25 billion revolving line of credit as well as $1.9 billion in cash and short-term investments. In addition, the company announced that the remaining $800 million share repurchase is canceled in the near-term to protect liquidity until external circumstances improve.
Currently, Dollar Tree is in the middle of remodeling 1,250 Family Dollar stores while launching the new Dollar Tree Plus! 2.0 initiative. The Plus! initiative will allow Dollar Tree to charge more than $1 per item, with a company projection of $2.25 by 2024. This move is projected to increase same-store sales by 11.7% by 2020 per a Jeffries analyst.
Dollar Tree's forward price to earnings of 15.6 is lower than the discount retail competitor Dollar General's (DG -1.27%) forward price to earnings of 23.42. Additionally, Dollar Tree carries a lower price to sales of 0.75 against Dollar General's 1.63. Both retailers operate over 15,000 locations, however, Dollar General sells items above $1, which gives reason to Dollar General's EBITDA margin of 10.24% against Dollar Tree's 9.44%. As both companies share prices that are appropriately valued, there is a higher degree of reward for the risk undertaken by purchasing Dollar Tree as Dollar Tree Plus! will closely align the two companies business models -- enabling Dollar Tree to expand the inventory offerings and increase profitability.
Verizon Communications
Consumers are heavily reliant upon mobile devices as the main form of communication, which is driving Verizon Communication (VZ 0.12%) to focus on network expansion. Ericsson predicts that the newly established 5G network will carry 45% of total mobile data traffic by 2025, which is why the largest U.S. cellular phone carrier is placing a high priority on the 5G rollout. With an increased wireless capability provided by 5G, Verizon will have the ability to sell bundled wireless home internet and mobile data plans -- potentially attracting more consumers.
Verizon's share price has held up against the recent market volatility with a share price decrease of 5.65% year to date in combination with an impressive 4.25% forward dividend yield that the company states "is in the position to support further dividend increases." Dividend growth over 13 years has generated a modest five-year CAGR of 2.51%, which outpaces telecommunications competitor AT&T's (T -0.70%) five-year CAGR of 2.09%.
The share price of Verizon trades at a forward price to earnings of 12 which is a discount in comparison to the sector median of 16.48. This discount to the sector gives good reason to own Verizon in addition to a sector beating EBITDA margin of 36.55% against the sector's 20.69%. Verizon's debt to EBITDA of 3.71 is concerning as a long-term debt of $100.7 billion weighs on the balance sheet, however, the company generated $17.8 billion free cash flow in 2019 with cash on hand balance of $2.6 billion -- showing financial stability during a heavy investment period.
Lastly, Verizon announced in April a definitive agreement to acquire the video conferencing platform BlueJeans, a competitor of the rapidly expanding Zoom Video Communications (ZM 1.37%). This acquisition would bolster Verizon's business segment which generated $31.4 billion in 2019 or 25% of overall revenue. BlueJeans stated that the company will be close to profitability within the "next few months" in addition to reaching $100 million in revenue – which is great news for Verizon.
