Why Defensive Stocks Are Making a Comeback Amid Economic Uncertainty

Economic Conditions and Investor Sentiment

Economic uncertainties, including wage gaps, geopolitical tensions, and global market volatility, are influencing investor sentiment. Companies like Walmart, Coca-Cola, PepsiCo, Procter & Gamble, and Johnson & Johnson highlight these challenges, driving a preference for defensive stocks due to their perceived stability amid such conditions.

"And the living wage gap may be costing the economy more than $4,500,000,000,000 every year.By voting for item 7, shareholders can urge Walmart to account directly for its poverty wages and resulting costs to society, which in turn affect the economic health upon which diversified portfolios depend." --- (WMT, event transcript, 2024/06/05)

"CRITICAL ACCOUNTING POLICIES AND ESTIMATES Recoverability of Equity Method Investments and Indefinite-Lived Intangible Assets Our Company faces many uncertainties and risks related to various economic, political and regulatory environments in the countries and territories in which we operate, particularly in developing and emerging markets." --- (KO, sec filing, 2024/Q1)

"In addition, volatile economic, political, social and geopolitical conditions, civil unrest and wars and other military conflicts, acts of terrorism and natural disasters and other catastrophic events in certain markets in which our products are made, manufactured, distributed or sold, including in Argentina, Brazil, China, Mexico, the Middle East, Pakistan, Russia, Turkey and Ukraine, continue to result in challenging operating environments and have resulted in and could continue to result in changes in how we operate in certain of these markets." --- (PEP, sec filing, 2024/Q1)

"ECONOMIC CONDITIONS AND UNCERTAINTI ES Global Economic Conditions. Our products are sold in numerous countries across North America, Europe, Latin America, Asia, Australia and Africa, with more than half our sales generated outside the United States." --- (PG, sec filing, 2024/Q3)

"In addition, the Company monitors the global capital markets on an ongoing basis and from time to time may raise capital when market conditions are favorable." --- (JNJ, sec filing, 2024/Q1)

Performance of Defensive Sectors vs. Broader Market

Defensive sectors, including telecommunications, healthcare, and consumer staples, are showing resilience and incremental performance improvements. Companies like AT&T, Johnson & Johnson, Walmart, Coca-Cola, and PepsiCo report stable or rebounding business performance, driven by strategic management, innovation, and favorable market conditions, contrasting with broader market volatility.

"And boy, if we get the formula figured out in the mid-part of the business market, which we continue to work really hard on and haven't gotten quite where I'd like to get, I think that could be another great opportunity for us to show incremental improvement in our performance.Look, what I would also tell you is, do I think that ultimately, we're going to see a situation where the quality of growth is examined more carefully, yes, I do." --- (T, earning call, 2024/Q2)

"Some of those stocking dynamic dynamics I mentioned bled into April, but month-on-month, we saw strong rebound of that business, in fact, to the end of the quarter back to historical levels.And so as we look to the back half of the year, while it's been a slower start there, we're very confident that we're going to be able to bring that business back to historical norms, driven primarily by innovation." --- (JNJ, earning call, 2024/Q2)

"The increase was primarily driven by the Walmart U.S. segment, due to managing prices aligned to our competitive price gaps, lower markdowns as a result of disciplined inventory management and favorable business mix, partially offset by mix shifts into lower margin merchandise categories." --- (WMT, sec filing, 2025/Q1)

"Overall, our industry remains attractive and is expanding. We believe we're well positioned to capture the vast opportunities available to us.Across the world, we're continuing to navigate many varying market dynamics locally to deliver our global objectives." --- (KO, earning call, 2024/Q2)

"And we see it in, as you saw from our international business performance. And it's basically supported by two facts, very low unemployment or quite low unemployment globally and wages growing at a good pace in majority of the countries where we participate." --- (PEP, earning call, 2024/Q1)

Strategies Employed by Defensive Companies

Defensive companies like AT&T, Coca-Cola, PepsiCo, Walmart, and Johnson & Johnson are employing strategies such as cost reduction, consumer retention, margin expansion, supply chain quality assurance, and maintaining affordability to navigate economic uncertainty effectively.

"While we continue to actively work our legacy transition strategies to end of life products, reduce our operating footprint and eliminate fixed costs, we're advancing several cost savings and productivity initiatives to align with this reality, such as vendor and management workforce rationalization." --- (T, earning call, 2024/Q1)

"James Quincey: Yes, so we as from a strategy perspective, have taken the approach over the last number of years, it cannot say even longer, that it's critically important, particularly when times get tougher to try and keep as many consumers in the franchise as possible, rather than trying to re-recruit them at some later stage." --- (KO, earning call, 2024/Q2)

"We look at that very carefully. Now why are our margins expanding internationally because as we gain scale and obviously, that our fixed cost leverage is much better, and that's how we're getting to more profitable businesses in international markets, especially the large markets, whilst we keep affordability at the center of our strategy because that's long-term, including other things that we do, obviously, with availability and with innovation." --- (PEP, earning call, 2024/Q1)

"Thank you for defending your shareholders and opposing Proposal 4. Can you expound on why the Walmart strategy of continuing review is a better guarantor than of quality assurance and pork supply chain than time bound commitments?" --- (WMT, event transcript, 2024/06/05)

"Please note that this presentation contains forward-looking statements regarding, among other things, the company's future operating and financial performance, market position and business strategy." --- (JNJ, earning call, 2024/Q1)

Role of Dividends and Stable Cash Flows

Defensive stocks like PepsiCo, Procter & Gamble, Walmart, and Johnson & Johnson emphasize stable cash flows to ensure consistent dividend payments. These companies leverage their robust free cash flow to maintain financial flexibility, meet obligations, and return value to shareholders through dividends, underscoring the importance of stable cash flows in economic uncertainty.

"We expect to continue to return free cash flow to our shareholders primarily through dividends while maintaining Tier 1 commercial paper access, which we believe will facilitate appropriate financial flexibility and ready access to global capital and credit markets at favorable interest rates." --- (PEP, sec filing, 2024/Q2)

"We view adjusted free cash flow as an important measure because it is one factor used in determining the amount of cash available for dividends, share repurchases, acquisitions and other discretionary investments." --- (PG, sec filing, 2024/Q3)

"Capital Resources We believe our cash flows from operations, current cash position, short-term borrowings and access to capital markets will continue to be sufficient to meet our anticipated cash requirements and contractual obligations, which includes funding seasonal buildups in merchandise inventories and funding our capital expenditures, acquisitions, dividend payments and share repurchases." --- (WMT, sec filing, 2025/Q1)

"Cash flow from financing activities of $0.5 billion was primarily from: (Dollars In Billions) $ (2.9) dividends to shareholders (1.5) repurchase of common stock 4.4 net proceeds from short and long term debt 0.2 proceeds from stock options exercised/employee withholding tax on stock awards, net 0.2 credit support agreements activity, net 0.1 other and rounding $ 0.5 Net cash from financing activities The Company has access to substantial sources of funds at numerous banks worldwide and has the ability to issue up to $20 billion in Commercial Paper." --- (JNJ, sec filing, 2024/Q1)

"Our strong free cash flow has also enabled us to pay down debt. We finished the first quarter with net debt to adjusted EBITDA of 2.9 times and continue to expect to reach our target in the 2.5 times range in the first half of 2025." --- (T, earning call, 2024/Q1)

Impact of Macroeconomic Policies on Defensive Stocks

Macroeconomic policies are expected to have a limited impact on defensive stocks like Procter & Gamble due to existing contracts and holding policies. However, Coca-Cola highlights the risk of additional impairment charges if macroeconomic conditions worsen, indicating that defensive stocks are not entirely immune to economic shifts.

"There will be some impact on the current fiscal year, but given flow through of contracts and various holding policies, I expect that to be limited." --- (PG, earning call, 2024/Q3)

"If the near-term operating results of this trademark do not achieve our revised financial projections, or if the macroeconomic conditions change causing the discount rate to increase without an offsetting increase in the operating results, it is likely that we would be required to recognize an additional impairment charge." --- (KO, sec filing, 2024/Q1)

Global Events Influencing Defensive Stocks

Global events such as consumer trends, market volatility, and political positions significantly influence defensive stocks. Companies like Coca-Cola, PepsiCo, Procter & Gamble, Walmart, and Johnson & Johnson leverage their global presence and adaptability to navigate these challenges, ensuring stable performance amid economic uncertainty.

"Moreover, these events provide tremendous value to our system as they enable a scaled approach across impactful moments that resonate with millions of consumers around the world." --- (KO, event transcript, 2024/05/01)

"And if I could just sneak in from the at-home versus away-from-home consumption globally, as you see some of the weaker trends from the lower income consumer, are you seeing any acceleration in that shift, which might be helping your business on a global basis as well? Thanks." --- (PEP, earning call, 2024/Q1)

"So first off, if you could just I know you said volatile a few times, but just if you could give us a sense for sort of a high level expectation for global market growth over the next 12 months." --- (PG, earning call, 2024/Q3)

"racial discrimination.4th, we note that recent events have made clear that companies destroy shareholder value when they take overtly political and divisive positions that alienate consumers." --- (WMT, event transcript, 2024/06/05)

"Tim Schmid: Sure. And Danielle, we are fortunate to have a global business with more than 50% of our revenue already out of the U.S. And I think that gives us the flexibility to really manage a number of challenges that occur on a quarterly and yearly basis across the world." --- (JNJ, earning call, 2024/Q2)