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Inflation has surged to a 40-year high lately due to the immense fiscal stimulus packages offered by the government in response to the pandemic. As a result, the Fed has begun to raise interest rates aggressively, in an attempt to keep inflation under control. The aggressive hikes of interest rates have significantly increased the risk of a recession in 2022 or 2023. Therefore, investors should make sure that their portfolios include only recession-proof stocks. In this article, we will analyze three high-quality stocks, which have repeatedly proved resilient to recessions.

Parker-Hannifin (PH)

Founded in 1917, Parker-Hannifin is a diversified industrial manufacturer that specializes in motion and control technologies. Parker-Hannifin enjoys some key competitive advantages, such as its immense scale, its global distribution network and its technical expertise thanks to its long history.

As an industrial manufacturer, Parker-Hannifin would normally be considered vulnerable to recessions, given that industrial activity greatly decreases during rough economic periods. However, the company manufactures components that are critical to the operations of heavy machinery, factory equipment, aircrafts and other large industrial devices. As a result, the demand for the products of Parker-Hannifin remains firm even during recessions.

The recession-proof character of Parker-Hannifin is clearly reflected in its exceptional dividend growth record. The company has one of the longest dividend growth records in the investing universe, with 65 consecutive years of dividend growth, and hence it belongs to the best-of-breed group of Dividend Kings.

Moreover, Parker-Hannifin enjoys strong business momentum. Despite the pandemic, the company has posted record earnings per share in each of the last two years, with no signs of fatigue on the horizon.

In the second quarter of its fiscal 2022, Parker-Hannifin grew its sales and its organic sales by 12% and 13%, respectively, over the prior year’s quarter. It also grew its adjusted earnings per share by 29%, from $3.45 to $4.46, thanks to robust demand in nearly all its markets. The company exceeded the analysts’ estimates by an impressive $0.53 and posted record sales and operating margin for a second quarter.

It also raised its guidance for its organic sales growth in fiscal 2022 from 7%-10% to 10%-12% and its adjusted earnings per share from $16.95-$17.65 to $17.80-$18.30. At the mid-point, the new guidance implies 20% growth vs. the record earnings the company achieved last year. It is also impressive that Parker-Hannifin has exceeded the analysts’ earnings-per-share estimates for 20 consecutive quarters.

Parker-Hannifin also has an exceptional growth record. Since 2010, it has more than tripled its earnings per share, primarily thanks to acquisitions. The company is currently in the process of acquiring Meggitt, a global leader in aerospace and defense motion and control technologies, for $8.8 billion in a cash deal. Meggitt offers technology and products on every major aircraft platform and has annual revenues of $2.3 billion. As the deal value is 24% of the market capitalization of Parker-Hannifin, it is obviously a major deal for the growth prospects of the company. The deal is expected to close in the third quarter. Overall, we expect Parker-Hannifin to remain in its reliable growth trajectory for many more years.

PPG Industries (PPG)

PPG Industries is the largest paints and coatings company in the world. Its only competitors of similar size are Sherwin-Williams and Dutch paint company Akzo Nobel. PPG Industries was founded in 1883 as a manufacturer and distributor of glass and today it has approximately 3,500 technical employees located in more than 70 countries.

The key competitive advantage of PPG Industries is its reputation in the paints and coatings business. In addition, there are only three companies of such a large size in this business and hence there is limited competition. As a result, PPG Industries has been able to offset volume declines with material raises of the prices of its products.

Thanks to its wide business moat and its resilience to recessions, PPG Industries has exhibited an exceptional dividend growth record. It has grown its dividend for 50 consecutive years and thus it has become a member of the Dividend Kings. Thanks to its low payout ratio (29%) and its solid balance sheet, the company can easily continue raising its dividend for many more years.

PPG Industries has proved resilient to the coronavirus crisis. In 2020, which was marked by a fierce recession due to the unprecedented lockdowns, the company incurred just an 8% decrease in its earnings per share. Even better, in 2021, PPG Industries rebounded strongly, with a 19% increase in its earnings per share, to a new all-time high.

PPG Industries is currently facing a headwind from the surge of inflation, which has greatly increased the cost of the raw materials of the company. However, thanks to its strong pricing power, the company expects to offset this headwind with meaningful price hikes in all its business lines. As a result, analysts expect PPG Industries to achieve a new all-time high in its earnings per share this year.

Donaldson (DCI)

Donaldson has been creating filtration solutions for a wide array of applications since 1915. It produces filters used in various engine and industrial applications, but it has also expanded its product portfolio to other categories as well thanks to continuous innovation.

Most investors would expect Donaldson to be vulnerable to recessions due to the industrial nature of its business. However, the company has proved resilient to recessions. To be sure, Donaldson incurred just a 1% dip in its earnings per share in 2020 and emerged stronger from the pandemic, with 14% growth of earnings per share in 2021, from $2.03 to a new all-time high of $2.32.

Donaldson is currently facing a headwind from inflation, which has greatly increased the costs of raw materials, labor and freight. However, the company expects to offset this headwind with material price hikes and expects to grow its earnings per share by approximately 17% this year, from $2.32 to a new all-time high of $2.66-$2.76.

Donaldson has grown its earnings per share by only 3.3% per year on average over the last decade. It is also important to note that the company has exhibited a somewhat volatile performance record, with a decrease in its bottom line in some years. Investors should be aware of this volatility.

On the other hand, the future of Donaldson seems brighter than its past. The company is likely to grow its earnings thanks to organic growth, price hikes and acquisitions of smaller companies. Notably, the company has raised its dividend for 34 consecutive years but it has raised its dividend by only ~2% per year in each of the last three years. Given the solid payout ratio of 33%, it is evident that management could have raised the dividend faster but it has preferred to invest in growth endeavors instead. This bodes well for the growth prospects of the company. Thanks to all the aforementioned growth drivers, we expect Donaldson to grow its earnings per share by approximately 8% per year on average over the next five years.

Final Thoughts

One of the most important investing criterion is the resilience of a stock to recessions. This is especially true in the current investing environment, in which the risk of an upcoming recession has significantly increased lately. The above three stocks have proved resilient to recessions and have always emerged stronger from them. They are thus ideal candidates for patient investors, who can wait patiently through recessions by focusing on the fundamentals of their holdings.