Every investor is mainly concerned with one thing: protecting his or her portfolio.
Right now, one of the biggest problems facing investors is where to find this protection. Traditionally, investors would look to the bond market for protection but with interest rates at record lows, many now consider bonds overvalued.
With this being the case, investors are looking to defensive stocks to provide protection, stability and income for their portfolios.
Top defensive picks
BT (LSE: BT-A), Talktalk (LSE: TALK), KCOM (LSE: KCOM) and Sky (LSE: SKY) are four of the market’s most defensive stocks. These four companies provide a range of multimedia services to customers, which are usually sold on contracts that last for a year or more, yielding a regular, recurring income for the providers.
For example, thanks to a recurring income stream from customers Sky has generated £8.5bn in cash from operations during the past five years. The company’s capital spending only amounted to £2.6bn over the same period. Sky produced 100p per share in cash last year.
The company has been able to achieve these returns despite the tough economic environment. Shareholder equity has increased at a compound annual rate of 41% since 2010 and since 2009, Sky’s shares have outperformed the FTSE 100 by more than 100%.
Similarly, since the end of 2011 BT’s earnings per share have almost doubled, while revenue has declined by more than 10%. BT has been cutting costs and moving into more lucrative markets to boost margins, cash flow and grow shareholder equity.
BT’s shares currently support a dividend yield of 3.4% and trade at a forward P/E of 13.3. According to current City projections, BT’s earnings per share will expand by 7% in 2017, indicating that the shares are trading at a 2017 P/E of 12.5. Based on the same figures, BT’s shares are set to yield 3.7% for 2017.
Over the past five years, including dividends, BT’s shares have returned 26.8% per annum.
Defensive qualities
Both KCOM and Talktalk have similar defensive qualities to their larger peers BT and Sky.
KCOM currently trades at a forward P/E of 11.9 and supports a dividend yield of 6.6%. The payout is covered one-and-a-half times by earnings per share. Unfortunately, City figures suggest that KCOM’s earnings will remain constant for the next two years although analysts have pencilled in a dividend payout increase of 5.1%. On this basis, KCOM’s shares will yield 6.9% next year.
City analysts believe Talktalk can grow earnings per share by 70% this year, as actions to cut costs take effect and profit margins expand. Moreover, Talktalk’s City analysts have pencilled in earnings growth of 53% for 2017.
And based on these forecasts, Talktalk’s shares are trading at a 2017 P/E of 13.5. The company currently supports a dividend yield of 4.4%, and the payout is set to increase by 26 during the next two years. These projections indicate that Talktalk’s shares will support a yield of 5.5% during 2017.