The outlook for 2023 on the FTSE 100 isn’t looking sparklingly optimistic. So with £3,000 to invest today, and an eye on the likely tough economic year ahead, which three FTSE 100 stocks would I buy?
Picks and shovels
National Grid (LSE: NG) seems like the ultimate ‘picks and shovels’ investment to me. In a gold rush, not everyone finds gold. But those who supply the goods and services that the prospectors need should make their money.
I see the same in the energy delivery business. However our energy is generated, and by whom, it has to flow through the National Grid networks.
National Grid shares climbed early in 2022, presumably seen as a defensive investment. But the latest energy crisis has sent them down again, back to ‘valuation-as-usual’.
The biggest long-term risk I see is the decline of fossil fuel usage. That could eventually lead to the gas network becoming obsolete. But I reckon whatever doesn’t flow that way must surely flow via electricity instead.
The share price fall puts National Grid shares on a forecast price-to-earnings (P/E) ratio of nine. And there’s a predicted 2023 dividend yield of 6%.
Reliable dividends
Few companies have been paying dividends as reliably as British American Tobacco (LSE: BATS). Well, except maybe its peer Imperial Brands. The British American share price has been in a decline over the past five years.
That’s left the stock on a forecast P/E of only 10. And we have a predicted dividend yield for the current year exceeding 7%. By 2023, analysts reckon the company will be handing over 8%.
The main risk seems obvious. Humans might, eventually, manage to give up on tobacco and consign its producers to history. But tobacco consumption remains stubbornly strong, especially across the developing world. And I suspect its decline will take a very long time.
Meanwhile, British American should have plenty of time to keep developing new tobacco products that don’t involve filling lungs with smoke.
Long-term sentiment
My third pick is not on a low P/E valuation like the first two. It’s Unilever (LSE: ULVR), with a 2023 forecast P/E of around 18.5. That’s higher than the FTSE 100’s long-term average, but relatively low by Unilever’s standards. We’ve traditionally seen a premium valuation because investors like the company’s defensive characteristics.
The Unilever share price is quite a bit below its pre-pandemic peak now.
One danger is that rising inflation and interest rates will lead to people spending less and buying fewer Unilever products. Investors might also see the share valuation as still being a bit rich, and more in line with previous better times.
But I think Unilever’s wide range of essential products makes it one of the most defensive producers of all retail brands.
Portfolio
Starting a FTSE 100 portfolio today, I’d also be attracted to what I see as depressed recovery candidates. In particular, I’m thinking of banks and housebuilders.
But these three would almost certainly be in there, as the three I rate among the strongest defensive buys for 2023.