While markets are showing some signs of recovery in 2023, the economy isn't out of the woods yet. Interest rates and inflation remain high. And some Federal Reserve staff members expect a mild recession to occur later this year as economic challenges in banking and other sectors broadly weigh down consumer and business confidence. Let's discuss why Dollar General (DG -0.36%) and Phillip Morris International (PM -3.87%) look uniquely well-suited to this uncertain economic environment and could richly reward their long-term investors.
Dollar General
With more than 19,000 locations, Dollar General is America's largest dollar store chain, having grown tremendously since its founding in 1939. And while the brick-and-mortar retail industry is relatively mature, investors will love its super-safe business model and affordable valuation.
Dollar General can undercut the prices of big box retailers like Walmart and Target through several strategies, including less elaborate stores, less staff, and placing its locations in areas with lower real estate costs. These savings are passed on to consumers, helping its stores attract customers when money is tight.
According to management, inflation has eroded purchasing power, attracting wealthier shoppers that wouldn't typically visit a dollar store. Such trends will likely accelerate if the U.S. economy enters a full-blown recession. And to maximize its potential, the company is broadening its appeal by adding more fresh food options (such as fruits and veggies) and expanding the selection of products priced over $1.
With a price-to-earnings (P/E) of 19, Dollar General is cheaper than the S&P 500 average of 24, adding another layer of safety to the stock.
Phillip Morris International
Like grocery retail, tobacco is also mature and recession resistant because of the habit-forming nature of nicotine. Phillip Morris takes the industry's advantages a step further through its internationally diversified business model and pivots to safer reduced-risk products.
Unlike its U.S. counterpart, Altria, Philip Morris's revenue is generated all over the world, with no particular region representing more than 30% of total shipment volume. And while the company has historically had a minimal presence in the U.S. market, that is set to change after its $16 billion acquisition of oral tobacco maker Swedish Match.
Image source: Getty Images.
The deal gives Phillip Morris access to a portfolio of products and U.S. distribution networks, which will help it roll out Iqos, a hugely popular heated tobacco system designed to reduce the risks involved in traditional cigarettes. As of the first quarter, products like Iqos represent 35% of Phillip Morris' revenue, putting the company in a position to appeal to increasingly health-conscious consumers.
The stock is also relatively cheap, with a price-to-earnings (P/E) multiple of just 16. Management returns value to investors through a dividend that yields 5.3% and has grown for 14 consecutive years.
The value of safe stocks
While many investors love the excitement and explosive potential of growth stocks, it is important to also diversify your portfolio with defensive companies that can perform well in any economy.
With their low valuations and recession-proof business models, Dollar General and Phillip Morris fit the bill and could make good buys in May and beyond. To me, Phillip Morris looks like the better buy because of its higher dividend yield and lower valuation. For investors who prioritize safety, a reliable dividend payment is an excellent way to earn consistent income regardless of the short-term fluctuations in the stock market.
