2 defensive stocks looking attractive since recent falls

These defensive dividend growers are on sale.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Some of the more defensive firms on the London stock market are showing weaker share prices over the last few weeks, such as Hikma Pharmaceuticals (LSE: HIK) and Britvic (LSE: BVIC).

In some ways, that’s not surprising as many have enjoyed a good run-up over an extended period stretching into years.

Why these two are defensive 

Firms tend to earn the label ‘defensive’ if they have businesses with evergreen characteristics. Economic cycles, recessions and slowdowns tend to effect such businesses less than companies with more cyclical operations.

I think one of the main reasons a firm’s business exhibits defensive traits is because its goods and services often have a short life. Therefore, customers use up their purchase quickly and return to buy more, repeatedly. On top of that, defensive firms often deal in products deemed ‘essential’ by many users.

Hikma Pharmaceuticals’ business, providing generic and branded medicines to patients around the world, is a good example. People don’t tend to skip their medical treatments and medicines tend to be used up within a short time. Because of that, the company has built up an impressive record of cash flow, which supports profits.

Meanwhile, Britvic’s soft drinks business also supplies products with a short life. The power behind the firm’s success is found in its strong, well-known brands such as J2O, 7up, Robinsons and Tango. Customers’ brand loyalty seems to drive consistent cash inflows for Britvic and, just like Hikma Pharmaceuticals, the company has a decent record of cash flow supporting profits.

Uncertain times

To me, the crux of the case for investing in these two firms is in their ability to generate cash whatever the economic weather. If they keep generating cash then they can keep paying a dividend, and I think the niches they occupy in their sectors leaves them well placed to do that.

Defensive firms like Hikma Pharmaceuticals and Britvic can be popular with investors when interest rates are low and there is a lot of economic uncertainty in the air. The dividend yield available from many defensive firms can beat the rate of interest from many bank accounts. Investors have been buying the defensives, and price-to-earnings (P/E) ratings have risen with share prices as a result of all that buying.

However, recent events such as Britain’s vote to leave the European Union and the election of Donald Trump in the US seem to have led to a change in investors’ expectations for the macroeconomic environment, and some investors seem to be rotating out of defensive shares into more cyclical investment.

Decent long-term prospects

Hikma Pharmaceuticals and Britivic have seen their share prices ease off over recent weeks, but the directors of both firms seem optimistic about the longer-term prospects for their companies. 

At a share price around 1,651p, Hikma Pharmaceuticals’ forward yield runs at just over 1.5% for 2017 and forward earnings are expected to cover the payment an impressive five times. With the shares at 547p, Britvic’s forward yield is around 4.4% with the payout covered almost twice by forward earnings.

I think right now looks like a good time to research these two defensive dividend growers with a view to buying some of their shares for the long haul.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended Britvic and Hikma Pharmaceuticals. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »