With the coronavirus outbreak still causing uncertainty in the market, now could be an excellent time to buy defensive shares.
The market is likely to remain turbulent for some time. Financial analysts are still trying to determine the impact that the virus will have on the global economy. With more uncertainty on the horizon, I think buying defensive stocks could be a great strategy to weather the storm.
Defensive dividend share
Unlike other FTSE 100 businesses, energy company SSE (LSE: SSE) is committed to its dividend. In a recent trading update, SSE announced its board would be recommending a full-year dividend of 80p per share.
If the business maintains its dividend, I believe income investors who might be considering selling their positions in Shell or BT could seek out SSE shares.
The business acknowledges that there is a possibility that the economic fallout of the coronavirus outbreak may harm its results. It is a situation that the company is monitoring closely, but “has not so far had any material impact on SSE’s financial results for 2019/20”. As a clean infrastructure business, SSE might avoid the worst of the economic damage caused by the virus, unlike other industries.
As the demand for cleaner energy increases, I would expect this to have a positive impact on SSE’s revenue growth and profitability over the long term. This outlook will please buyers of defensive shares and growth investors alike.
SSE shares are currently trading with a prospective dividend yield of 7.5%. The business hopes to increase its dividend payments in the coming years to at least the rate of inflation. With SSE’s generous dividend and defensive nature, this could be a great share to buy and hold.
British American Tobacco
Tobacco stocks have been out of favour with investors for some time, due to overall consumption declining in many places around the world. Of course, the volume of cigarettes sold will probably continue to decline in the future. So far, tobacco companies have managed this reduction in volume by increasing prices.
However, in a recent update, British American Tobacco (LSE: BATS) said it had a strong start to the year, with volumes increasing by 0.4%. Despite the ongoing uncertainties surrounding the impact of coronavirus, the company is committed to its high single figure earnings growth target for 2020. This will please buyers of defensive shares, who are on the lookout for stable earnings in times of economic uncertainty.
Despite this, its share price is down by 6% in the year-to-date. Consequently, the shares have a price-to-earnings ratio of 10.
In the future, BATs plans to increase margins further and to convert 90% of adjusted profit into operating cash flow. The group is conscious that customers will move away from cigarette products. It has an ambitious aim of reaching £5bn of revenue in its alternative tobacco and nicotine products.
With the slump in its share price and defensive qualities, now could be a great time to invest in the company.