It is not like I am expecting a recession or even a slowdown. But I do think that it is a good idea to allocate a proportion of my stock investing portfolio to FTSE 100 defensives or safe shares.
Why buy FTSE 100 defensives
The reason is that economic growth happens in cycles. This means that we should always be prepared for the next phase, and that includes downturns. Moreover, sometimes these come about unpredictably, as we saw last year.
The FTSE 100 index has a number of high-quality defensives to choose from, ranging across sectors from healthcare to technology, that I can choose from today. Here are two of them:
#1. Hikma Pharmaceuticals: robust health
After touching all-time highs in October, drug manufacturer Hikma Pharmaceuticals (LSE: HIK) has now seen a share price fall of 18%. But going by its results, I think that the manufacturer of Covid-19 medication is due for another share price rally.
For the full year 2020, the company saw a 23% increase in operating profit and its revenues increased as well. It expects to continue making progress in 2021 too.
A small positive in buying the share is also its dividend payouts. It has a yield of 1.6%, but it is increasing its dividends.
The flipside here is that its reported earnings per share (EPS) fell by 9% in the year. To me, this makes further increases in dividends unlikely.
Also, I think this FTSE 100 share could take its time to start rising from here. Defensives or safe stocks are less attractive to investors now, as the economic outlook improves. For the long-term, though, it is a buy for me.
#2. Unilever: back to market crash levels
The consumer staples’ giant Unilever (LSE: ULVR) saw a sharp share price fall early last month after it reported an underwhelming set of financials. Both the company’s revenues and profits fell.
Going by the company’s past resilience however, I see this more as a blip than the start of a trend. This is even more so now that the economy will recover in 2021.
Importantly, for income investors the 1% decline in its EPS was disappointing too. The Unilever stock did not have a high dividend yield in the past. But after the hit to dividends across the board in 2020, it does look relatively more attractive from the income perspective. It has a yield of 3.6% now, which I think is alright compared to many others.
The risk to Unilever is that of a slow recovery or if cost pressures mount.
Another poor year for the UK’s consumer giant will tell further on its share price. Investors have made their disappointment with the latest results amply clear already. In the weeks following the results, its share price dropped to the levels seen during last year’s stock market crash.
The FTSE 100 share has started recovering since, and I am optimistic about its prospects on balance.