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2 top recession-proof stocks to play it safe

There’s much debate over whether Britain will see a recession at some point due to the result of the Brexit vote, but one thing is certain, there’s a clear consensus that the economy will slow down markedly in the coming months.

With this in mind, now may be the time for prudent investors to start thinking about adding recession-proof stocks to their portfolios.

Reckitt Benckiser

The consumer staples sector is usually a good bet in a recession. Everyday household products, such as soaps and disinfectants, are always in demand, even in recessionary periods. As a result, consumer staple stocks typically have stable revenue growth and predictable cash flows throughout market cycles.

From this sector, Reckitt Benckiser (LSE: RB) clearly stands out from the pack. The company’s 23.7% operating margin contrasts sharply with the industry’s average of around 8%, and demonstrates Reckitt’s wide economic moat and strong brand recognition.

Reckitt recently reported a strong set of results for the first half of 2016, with revenues up 5% from last year to £4,569m, while underlying earnings-per-share rose 16% to 114.7p. Management also reaffirmed its previous full-year guidance for like-for-like revenue growth of between 4% and 5%, and said it expects margin expansion to come ahead of earlier targets.

On 29 July, the company declared an interim dividend of 58.2p per share, which represents an increase of 16% on last year’s 50.3p. City analysts expect Reckitt’s final dividend for this year to grow at a similar rate, with shares currently forecast to trade at a forward yield of 2.1%. That may not seem a lot, but with dividend cover expected to rise to nearly two times this year, I think Reckitt is well positioned for further dividend growth in later years.

On a valuation perspective, Reckitt is somewhat expensive from a historical and relative basis. Shares currently trade at a forward P/E of 25.7, which compares unfavourably to the sector’s average of 20.4 and Reckitt’s own historical average of 18.9. So, although I believe Reckitt would make a great defensive stock pick, I’d hold off buying until the price dips.

B&M European Value Retail

Another sector that would likely benefit from tougher economic times is budget retail. Low-price stores attract more customers seeking value for money during leaner years, as that’s when consumers try harder to cut budgets on everyday spending. That’s what happened in the last recession, and the same would probably happen in the next.

B&M (LSE: BME) first listed on the stock market in June 2014, and investors have so far had a rough ride. Shares in the retailer have recovered from 2015 lows, but the stock continues to trade below its IPO levels.

After an initial bad spell for the company last year, trading is expected to bounce back strongly for B&M over the next few years. Like-for-like sales growth is expected to top 10% this year, with recent new store openings likely to push overall revenues 24% higher for the full year.

City analysts forecast earnings to grow at a 12% average annual pace over the next three years, with the company’s dividend payout ratio expected to rise from 37% now, to 50% by 2019. Currently at 277p a share, B&M trades at 19.5 times forward earnings and pays a 1.8% dividend.

Investment banks are bullish on the stock too. Out of 15 recommendations, 12 are strong buys, two are holds and just one is a strong sell.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.