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A recession is almost guaranteed, and this is finally sinking into the market. But with stocks still under pressure, we can focus on our next steps to protect the savings in our Tax-Free Savings Account (TFSA). A recession can be tough and long, but one thing we can count on is defensive stocks. It is the stocks that survive, because they are essential businesses that we cannot do without.
Elasticity of demand
Elasticity of demand measures how demand changes when economic factors change. Today, economic factors are changing dramatically. For example, interest rates go up. This increases consumer lending costs. So things like mortgage payments and line of credit payments go up. In turn, this reduces disposable income. At this point, consumers start looking for places to cut spending so they can meet essential bills like heating, food, and healthcare expenses.
Fortis (TSX:FTS)(NYSE:FTS) is a secure utility conglomerate. Essentially, as a regulated gas and electric utility company, its revenues are secure, predictable and resilient. Indeed, it is relatively immune to economic shocks such as inflation and rising interest rates. Heat and electricity are one of the last things to cut when consumers face tough times. In fact, they are usually not cut at all. This is called inelastic demand.
Protecting your TFSA: What recession?
With Fortis shares, we are building on decades of shareholder value creation. In fact, Fortis’ dividend has been growing steadily for 49 years. He not only fought inflation, but also any recession or other economic shock.
Today, Fortis shares yield a very respectable 4%. Importantly, this performance is supported by steady revenue and earnings growth. In fact, in its most recent quarter, earnings per share grew to $0.57 and operating cash flow to $759 million, an increase of 3.6% and 2.6%, respectively. .
Similarly, we can see the same when we look at the longer term track record of Fortis. For example, over the past five years, Fortis has grown its annual revenue by almost 14%, representing a compound annual growth rate (CAGR) of 2.6%. Cash flow from operations grew at a CAGR of 1%. While these numbers don’t blow the lights out, they are at least stable and consistent.
And stability and consistency is what we should be looking for right now. This is what will get us through a recession. Ultimately, the current goal should be to protect our money. Downside risk weighs heavily on the market today. Fortis shares offer essential protection.
Loblaw action: Getting defensive with food and medicine
Loblaw Companies (TSX:L) is Canada’s largest grocery retailer and drugstore leader. Again, dietary and medical needs are two of the last things to sacrifice when consumers are struggling financially – it really goes without saying. So that brings me to the Loblaw shares.
This stock is one of the best performers in 2022 – and I think this outperformance will continue. The downside risk for the market in general is significant. As we see today, investor sentiment is deteriorating as rumors of a recession grow louder. Loblaw is a great defensive stock that can be shelter in this storm.
But it’s not just good downside protection. It also has good upside potential. You see, inflation hits food prices. Naturally, grocers (and pharmacies) have the ability to pass on their higher costs. And that brings us back to price inelasticity – and why we want to hold stocks like Loblaw in our TFSA right now.
Loblaw’s latest quarter is testament to all of this. Adjusted earnings per share rose 25%, once again beating expectations, which is always a good signal for future stock price performance. Similarly, free cash flow was strong in the quarter at $517 million. Going forward, Loblaw will return some of this money to shareholders through share buybacks. The stock’s dividend yield is only 1.5%, but stock buybacks should provide support to protect your TFSA against the recession!