The UK’s latest economic growth numbers were dismal. Now retail sales show that the weakness continues. Even though December is the month of festive purchases, retail sales actually shrank compared to the month before. As a result, the chances that the Bank of England will cut the interest rate in its next meeting just increased. For investors, it means that Cash ISAs are set to become even less rewarding than they already are.
Not all defensives are safe
I’d much rather look at defensive stocks because they can continue to perform even during economic downturns. But not all defensives are made equal. I’d be very careful when choosing which among these is best worth my hard-earned money.
Consider the FTSE 100 household and personal products’ manufacturer Reckitt Benckiser (LSE:RB), for instance. While the past few years have been fraught with economic uncertainty in the UK, RB’s share price has shown no sustained increase. It’s true that there have been sharp spikes and declines that provide the opportunity for short-term investing. But here at The Motley Fool we are most interested in stocks that allow for long-term investing opportunities.
RB just isn’t one of them. I’m of the view that a growth investor is better off looking at other opportunities in the FTSE 100 set of companies. As also the dividend investor, for that matter. RB’s dividend yield is tepid at 2.3%, half the average yield for the FTSE 100.
Not all bad, though
Don’t get me wrong – Reckitt Benckiser is not a bad company. It has seen consistently rising revenues and is profitable. But its net profits fell according to the latest full-year data, which makes me a bit uncomfortable. I am hopeful though, because the earnings were better in the first half of the current financial year.
If it sustains its performance, I reckon that share price movements could be more consistent for the manufacturer of well-known brands like Dettol, Harpic, and Strepsils. But for now, I’d let it be, especially since it looks expensive with a price to earnings (P/E) ratio at 31 times.
Not all that contrarian
Instead, I would risk being called contrarian and consider a cyclical stock like the FTSE 100 oil and gas giant BP (LSE:BP). Its share price has seen its ups and downs, as is to be expected. As a result, its beta value, a measure of volatility, is higher than that for a defensive like RB.
But BP’s stable dividend yield is worth considering. It currently stands at 6.3% and has been consistently higher than the average yield for FTSE 100 stocks over the years. It also competes well with its peer Royal Dutch Shell, whose yield is exactly the same right now.
There’s more. If global growth picks up this year, as is expected, the chances of higher oil prices increases. Overtime, its future hinges on moving towards more environmentally friendly fuel sources, but for the foreseeable future BP looks like it’s in a good place.
