3 recession shares I’d buy in August

As the economic outlook continues to look unpromising, our writer picks a trio of recession shares he thinks might offer promise for his investment returns.

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We are in the second half of the year, during which the Bank of England expects the UK to enter a recession. That is bad news for the economy and could be awful news for certain companies. But some businesses can actually do well when the wider economic picture is bleak. Here are three recession shares I would consider adding to my portfolio in the coming month.

Vodafone

Will people use their phones and devices less in a recession?

Overall, I do not think so. Some may, while others might shop around for a better deal on their call and data plans. But in general I expect demand to stay robust in the telecoms sector even if the economy is performing weakly.

One company that could keep doing well on that basis is mobile giant Vodafone (LSE: VOD). The company operates across a wide range of countries and has a well-known brand. It is a highly cash generative business and last year Vodafone paid out €2.4bn in dividends. At the moment, the dividend yield is 6.4%. If I bought these shares, that income could come in handy to me in a recession.

There are risks to Vodafone, though. Net debt of nearly €42bn on the balance sheet could mean the dividend is reduced at some point if money is needed for interest payments instead. But strong demand and a large customer base make Vodafone one of the recession shares I would consider for my portfolio.

Carr’s

The agricultural supplier Carr’s (LSE: CARR) has a dividend yield of 5%.

I think its business model is fairly resilient. Selling feed, equipment and fuels to customers such as farmers is a business that will tend to see robust demand in good seasons and bad. One risk is inflation hurting profitability. If Carr’s cannot pass on the increase in costs on items such as fuel to customers, that threatens to hurt earnings.

But I see Carr’s as a durable business. It has weathered a dozen recessions in almost two centuries of trading. I would consider adding the company to my portfolio ahead of the next one.

British American Tobacco

Whatever else they may stop buying when money is tight, many smokers will not sacrifice cigarettes. That is one of the defensive qualities of shares such as British American Tobacco (LSE: BATS).

The long-term demand trend for cigarettes is still downwards. That is good for people’s health but could be bad for profits at the company. Then again, its pricing power should allow British American to charge customers more, which could help support profits. The firm is also aggressively moving into non-cigarette products.

The dividend yield is 6.4%. The shares have grown 23% in value over the past year. But they are still a third lower than the level they hit in 2018. If the business continues to perform well, I think its defensive qualities could attract more investors. So there may be potential for further share price growth.

I hold British American in my portfolio and would consider increasing my holding.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Christopher Ruane owns shares in British American Tobacco. The Motley Fool UK has recommended British American Tobacco and Vodafone. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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