I’m keen on FTSE 100 firms with defensive businesses. Unlike more cyclical outfits, the defensives are less prone to the famine-and-feast trading induced by undulations in the wider economic cycle.
Defensive businesses tend to enjoy evergreen trading whatever the economic weather because their products or services have some kind of ‘essential’ element that consumers are reluctant to give up no matter how tough their finances become. Such steady demand often leads to steady incoming cash flows and steady dividend payments for shareholders too.
Share prices have been weak
We can find defensive firms in sectors such as utilities, pharmaceuticals, tobacco and fast-moving consumer goods among others. Over recent years, though, the attractions of such firms have led investors to drive their valuations up, because they are good investments to hold in uncertain times and when interest rates are low. We’ve seen the so-called ‘bond-proxy’ trade where investors have viewed the dividends from defensive firms as a good proxy for investing in bonds when those bonds and savings accounts are paying low interest rates.
However, with general interest rates on the rise again, the bond-proxy trade seems to be unwinding and many defensive stocks have been on the slide through 2017 and into 2018. Yet defensive stocks retain their attractions, and just recently there’s some evidence on many of their share-price charts that the severe falls may be over. The valuations are keener than they were and ‘right now’ could be a good time to look more closely at them. Here’s how they stack up against some common valuation indicators.
|
Company |
Ticker |
Market Cap (£bn) |
Recent Share Price |
Fwd P/E 2018 |
Fwd Dividend Yield 2018 |
Forward earnings growth 2018 |
|
AstraZeneca |
AZN |
64 |
5,063p |
20 |
4% |
(18%) |
|
British American Tobacco |
BATS |
98 |
4,221p |
14 |
4.8% |
6% |
|
Bunzl |
BNZL |
7 |
2,116p |
17 |
2.3% |
4% |
|
Diageo |
DGE |
62 |
2,505p |
22 |
2.6% |
6% |
|
GlaxoSmithKline |
GSK |
72 |
1,437p |
13 |
5.6% |
(4%) |
|
Imperial Brands |
IMB |
24 |
2,488p |
9 |
7.5% |
0% |
|
National Grid |
NG |
28 |
827p |
14 |
5.7% |
2% |
|
Reckitt Benckiser |
RB |
44 |
6,150p |
18 |
2.8% |
5% |
|
Sage Group |
SGE |
7 |
670p |
20 |
2.5% |
11% |
|
Shire |
SHP |
33 |
3,589p |
10 |
0.8% |
8% |
|
Smith & Nephew |
SN |
12 |
1,323p |
19 |
2% |
4% |
|
SSE |
SSE |
13 |
1,291p |
11 |
7.5% |
5% |
|
Unilever |
ULVR |
116 |
3,943p |
19 |
3.5% |
6% |
British American Tobacco, GlaxoSmithKline, Imperial Brands, National Grid and SSE all offer high dividend yields and low-looking price-to-earnings ratios. But I think all of these firms are well worth your further research time.
Although the defensives tend to have stable underlying businesses, their valuations can swing in cycles as investor sentiment waxes and wanes. I don’t know if the current downward swing in valuations is over yet, but if the defensives keep falling, I think the value will become even more compelling.
One possible strategy is to put these stocks on your watch list with a view to picking up a few shares on the dips and down days. In the long run, I reckon dividend income and capital gains could come together to provide you with a decent total return on your investment.