The UK economy is facing a bleak winter – and it may be that next year continues in the same vein. But that does not mean that things will be bad for all businesses. Some can do well even when the wider economy is struggling. That helps explain why I continue to buy UK shares for my portfolio. Here are three I would purchase if I had spare funds to invest today.
Unilever
The consumer goods company Unilever (LSE: ULVR) is the business behind such well-known names as Marmite and Dove. Its focus on products that are used regularly by billions of consumers means it benefits from resilient demand. Owning premium brands gives it pricing power, allowing the firm to make juicy profits.
That has come in handy lately, as soaring inflation has pushed up the cost of making and selling its products. Unilever’s pricing power means it has been able to pass higher costs onto consumers without losing lots of sales volume.
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I see inflation as an ongoing risk to profitability, but I like the firm’s business model and its long-term prospects.
Direct Line
Whatever is happening to the economy, people will still need or want to insure their homes and vehicles. That means that demand for general insurance services should be robust.
I reckon one firm that can benefit from that is Direct Line (LSE: DLG). The company’s shares have fallen sharply, though. They now stand 30% below where they were a year ago.
Why is that? Partly I think it reflects investor concerns that rising vehicle costs could make claims settlement more expensive, hurting profits. The insurer’s first-half results also showed a decline of 9% in the number of policies in force compared to the same period last year. That business slump is obviously not what a lot of investors want to hear.
But I think the fall in the Direct Line share price offers a buying opportunity for my portfolio. Indeed I bought back into the insurer over the past couple of months. I see long-term demand in its market and reckon Direct Line’s strong brand can help it capitalise on that. With an 11.5% dividend yield, I am hopeful that Direct Line can provide me with some welcome passive income streams even during a recession.
British American Tobacco
The addictive nature of smoking means that many people keep doing it even when money gets tight. That makes tobacco a classic example of what is known as a defensive stock.
This might explain why investors have been buying into British American Tobacco (LSE: BATS). Over the past year, its performance has been the mirror image of Direct Line, with the share price increasing by 30%.
Even after that increase, the dividend yield is a juicy 6.4%. The company is highly cash generative, which could be good for future dividends. That is why I hold these UK shares.
The long-term decline in the number of cigarette smokers threatens both revenues and profits. But the company’s pricing power can help mitigate that and it is also building a non-cigarette business at speed.
