With a recession looming, many investors are thinking about what sort of shares to hold in their portfolios.
Often when the economy performs weakly, some investors look for what are known as defensive shares. These are ones that have properties to possibly shield it from an economic downturn, such as a loyal customer base or an essential role in daily life.
One defensive share I own has seen its share price jump by 30% over the past year. Despite this, I think it still looks cheap. Indeed, I would still consider buying more for my portfolio today.
A classic defensive share
The stock is British American Tobacco (LSE: BATS), the owner of brands such as Lucky Strike, Kent and Pall Mall.
In many ways I think British American looks like a classic defensive share. Smoking is addictive, so many people who buy cigarettes will continue to do so, no matter what happens in the economy. On top of that, high taxes and duties on cigarettes mean companies like British American can push up the wholesale price of their product without its final selling price increasing much.
In its outlook for this year, the company forecast a global tobacco industry volume decline of 2.5%. But it reckons it could grow its own revenues by 3-5%, excluding exchange rate impacts. That shows the pricing power tobacco makers have.
Even the 2.5% decline in global demand is likely due more to fewer people beginning to smoke than to existing smokers quitting because of economic pressures. However, in the long term, an ongoing decline in customer demand I see as the main risk to its revenues.
Attractive income prospects
British American again raised its annual dividend last year, as it has done for over 20 years on the trot. The shares now yield 6%, with the company typically paying four equal dividends spaced out across the year.
We all know dividends are never guaranteed. But with inflation at its highest level for decades, I see the potential for picking companies with big dividends as one way to protect the value of my portfolio. So British American’s yield looks particularly attractive to me, making it a suitable defensive share for my portfolio, in my view.
My move on the BATS share price
Although the British American Tobacco share price has moved up strongly, I continue to think the shares offer me good value. Not only is the dividend yield well above the FTSE 100 average, but the price-to-earnings ratio is 12. That does not look expensive to me.
I think its attractive valuation and high dividend yield continue to offer me value and I would consider buying more right now.