You may have noticed that the UK officially entered a recession at the end of 2023. However, not all recessions are built the same. A ‘recession’ means that the economy recorded two three-month periods of negative growth. This, by its nature, is based on backward-looking data.
When it comes to investing though, markets look ahead, trying to predict what will happen next. And certain data available now is suggesting that this recession could be short lived. Inflation has gradually fallen from its peak in October 2022. This means that interest rates are widely forecast to be cut this year. Unemployment remains relatively low and wage growth is healthy.
This positive data influences our investment decisions. Rather than looking at recession-proof businesses, we are looking to companies that could do well in an economic recovery. Crucially for income investors, some of these pay attractive dividends already, which could see a further boost in good conditions.
Resurging recruitment: PageGroup
PageGroup is one of the world’s leading recruiters. It focuses on permanent placements in a range of roles and industries, including finance & accounting, technology, legal and sales & marketing. A recovering economy should give businesses the confidence to start hiring again.
Given PageGroup’s strong brand and market position, it should be a direct beneficiary of this. The management team is also working to make the business more productive. This should potentially lead to higher margins as any economic recovery comes through.
The company has historically generated high cash levels. As a result, it already pays an attractive dividend, which is supplemented by extra payments in more buoyant times.
The makers’ maker: Vesuvius
Vesuvius manufactures production-related solutions for the steel and casting industries. An improving global economy should see a rise in steel demand, as industrial activity increases.
During the recent downturn, the company has been conserving costs. As such, rising demand could push a significant recovery in its margins and profits. The company pays a robust dividend, already well covered by its free cash flow.
Homing in on households: Dunelm
Dunelm is a market leading homewares retailer in the UK. The company has done well in tougher times, gaining market share due to its value offering.
However, it should potentially benefit as the economy and housing market improves as it has broadened its product offer to appeal to a wider range of customers. The company’s strong cash generation supports a healthy ordinary dividend, which is topped up with special dividends.
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Glossary
Dividend – A variable discretionary payment made by a company to its shareholders.
Economic cycle – The fluctuation of the economy between expansion (growth) and contraction (recession), commonly measured in terms of gross domestic product (GDP). It is influenced by many factors, including household, government and business spending, trade, technology and central bank policy. The economic cycle consists of four recognised stages. ‘Early cycle’ is when the economy transitions from recession to recovery; ‘mid-cycle’ is the subsequent period of positive (but more moderate) growth. In the ‘late cycle’, growth slows as the economy reaches its full potential, wages start to rise and inflation begins to pick up, leading to lower demand, falling corporate earnings and eventually the fourth stage – recession.
Free cash flow (FCF) – Cash that a company generates after allowing for day-to-day running expenses and capital expenditure. It can then use the cash to make purchases, pay dividends or reduce debt.
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