Some ASX shares could be good for protection against a recession.
Are all shares good for recession protection?
Not every share will prove to be defensive. Indeed some industries like banking are known to suffer during recessions. That's why the share prices of shares like National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) have fallen so much over the last few months. Though you may be able to pick up a bargain during a recession.
Share prices aren't guaranteed not to fall, that's what makes the share market so unpredictable. But there are some shares that may not see much of an earnings hit during a recession:
Here are four ASX shares I'd buy to protect against a recession:
Share 1: Coles Group Limited (ASX: COL)
We all need to keep eating whether we're in a booming economy, a recession or a global pandemic. So a supermarket seems like an obvious idea for protection as people need to keep buying their groceries. Indeed, Coles could see more volume if people are buying food less from restaurants, cafes and takeaways.
The ASX share has been solid during this COVID-19 period. In the FY20 third quarter it reported that its supermarket sales were up 13.1%. Costs were higher too due to health and safety measures. But it showed that supermarkets are resilient businesses.
The Coles share price has been steadily rising over the past few weeks. But it still offers a solid dividend, with a projected FY20 grossed-up yield of 4.5%. In terms of valuation, it's trading at 26x FY20's estimated earnings.
Share 2: TPG Telecom Ltd (ASX: TPG)
TPG is now one of the largest telcos in Australia after merging with Vodafone Australia. The combined business has a lot of synergy potential, both on the cost side and revenue side.
I don't know about you, but I view my internet connection as an essential service for my household. I'd keep paying for it over most other things if I were low on money.
The ASX share receives pleasingly consistent monthly income from its customers. The company also has growth potential with the upcoming 5G technology that could lead to a number of new services like automated cars.
The telco is expected to pay high ordinary dividends now that the merger has been successful.
Share 3: Rural Funds Group (ASX: RFF)
This is a real estate investment trust (REIT) which owns farmland across a variety of sectors including cattle, almonds, vineyards, cotton and macadamias.
It actually has very reliable rental income and profit because of its leases to high-quality tenants. The regular rental cashflow means Rural Funds shareholders get a lot of earnings and distribution visibility.
Like I said with Coles supermarkets, we all need to eat food. Rural Funds' tenants should still be fairly resilient in a recession.
Rural Funds aims to increase its distribution by 4% each year for unitholders. That's comfortably more than inflation. The ASX share is able to achieve that distribution growth through two key factors. The first is that there's rental indexation included in all of its contracts – rent growth is either a fixed 2.5% increase or it's linked to CPI inflation, plus market reviews.
At the current Rural Funds share price, it offers a FY21 distribution yield of 5.5% based on the distribution guidance of 11.28 cents per unit for this financial year.
Share 4: Bubs Australia Ltd (ASX: BUB)
Nutrition is one of the most important things. Bubs, an infant formula producer, provides an essential product for consumers.
The ASX share is experiencing very strong growth. In the quarter ending 31 March 2020, both its Chinese revenue and infant formula revenue more than doubled. So not only does it offer potentially defensive earnings, but its revenue is growing at a very fast rate.
In the next few years I think Bubs will be able to capitalise on the international market opportunity, particularly in places like Vietnam.
Bubs is an exciting small cap. I like that it's now cashflow positive which makes it a safer investment so that it doesn't need external funding for its day to day operations.
Foolish takeaway
I think Bubs can produce good returns over the next five years. However, for defensive income I think Rural Funds could be the best pick for yield – it has already proved itself during this COVID-19 period.
