The FTSE 100 is only 18.5% down so far in 2020. That’s despite the devastating economic effect of the Covid-19 pandemic. So, should we assume things are back to normal and invest in any stock that takes our fancy? No, I think I’m seeing a dangerously misguided feeling of short-term optimism. And I say we should be looking for defensive stocks.
I think the stock market recovery we’ve seen since March is overdone. And I think there’s a real likelihood of a double-dip stock market crash. I just don’t think investors have grasped the full seriousness of our current economic situation. Or how long it’s going to take us to get over it.
Figures released this week suggest the pubs, restaurants and hotels industry has lost around £30bn in revenue during the lockdown. That’s just one sector that’s been hammered. And even with customers returning, revenues will surely still suffer for some time to come. Perhaps ironically, investors have often seen hospitality sector stocks as defensive stocks.
Unwarranted optimism
What about the stock market outlook? I’m seeing optimistic forecasts across the board for 2021. All the City’s analysts seem to think the pandemic will end this year, and we’ll be back to normal next year. Well, the virus has certainly not gone away. Think we’ll get an effective vaccine before the end of the year? Even if we do, it won’t reverse the economic destruction we’ve already suffered. So, which defensive stocks would I buy?
Reckitt Benckiser (LSE: RB) is one. Its share price is actually up 23% so far in 2020, as investors have already seen it as an attractive defensive stock. And a first-half update Tuesday strengthened that feeling for me. The firm reported a 10.8% rise in net revenue for the period. That’s perhaps not surprising, as the company is big in health and hygiene products. When everybody is madly busy cleaning and scrubbing, Reckitt Benckiser seems like one of the best defensive stocks to hold.
Adjusted earnings per share picked up 14.5%, and it’s all translated into lots of lovely cash. Free cash flow, at £1,902m, was up 104.7% on the same period last year.
CEO Laxman Narasimhan said: “The world has changed beyond recognition in 2020. Covid-19 is likely to be with us for the foreseeable future and, as a society, we are embedding new hygiene practices to protect our way of life.” That reflects what I was just saying, that Covid-19 isn’t going to disappear any time soon. We need to adjust to that in everyday life, and as investors.
What price defensive stocks?
Saying that, the extra hygiene effect on Reckitt Benckiser will surely fall back. So what’s the valuation of the stock like? We’re looking at P/E multiples of around 24. That’s high compared to the FTSE 100 average, and the company is paying only modest dividends yielding around 2.3%.
But, traditionally, investors have afforded Reckitt Benckiser a premium valuation. That’s what happens to a company with a reliable progressive dividend policy. With strong dividend cover too, I rate Reckitt Benckiser as one of the best defensive stocks out there.