Mr Market is a manic depressive. Yet statistics reveal these stocks are the ones most resistant to market swings.
It is frustrating when the market falls, taking all your shares with it. If market movements are having a massive effect on your portfolio, it may be time you picked up some low-beta shares.
The 'beta' is a statistical measure of how a company's share price has moved, relative to the rest of the market. A company with a beta less than 1 has been found to move less than the market. This is typically because low-beta shares are considered less risky. Often, they are reliable and predictable businesses. This means that investors are less likely to believe economic or market developments will have a significant impact on long-term earnings.
I've used market statistics to find the largest companies with a beta less than 0.8. There are some familiar names here for defensive/income investors.
|Company||Beta||P/E (forecast)||Yield (forecast, %)||Market cap (£m)|
|Vodafone (LSE: VOD)||0.6||11.2||7.6*||87,853|
|Royal Dutch Shell (LSE: RDSB)||0.7||8.5||4.9||81,773|
|GlaxoSmithKline (LSE: GSK)||0.4||12.4||5.2||70,557|
|British American Tobacco (LSE: BATS)||0.5||15.4||4.2||62,521|
|Diageo (LSE: DGE)||0.6||16.8||2.8||43,176|
|BG (LSE: BG)||0.7||14.7||1.3||42,326|
|AstraZeneca (LSE: AZN)||0.4||7.9||6.1||36,822|
|Unilever (LSE: ULVR)||0.6||18.2||3.4||29,417|
|Tesco (LSE: TSCO)||0.7||10.1||4.4||27,334|
|Reckitt Benckiser (LSE: RB)||0.4||14.6||3.6||26,024|
* is an average of opinions on whether the special dividend will be paid again
I've picked four of these out as particularly interesting.
Anyone that thinks of Vodafone as a utility stock needs to see the company's most recent trading statement. Revenues were hit by a cut in termination rates (the price Vodafone can charge another network to call a Vodafone handset). Sales declined 7.7% in Italy and fell 10% in Spain.
These figures suggest that Vodafone's long-term earnings are not exactly copper-bottomed.
However, the dividend situation at Vodafone offers real hope. There remains a significant possibility that Vodafone will pay a special dividend again this year. Better still, this dividend could continue to recur.
Even without the special dividend, Vodafone is a great income stock. On last year's payout of 9.52p, the shares carry a 5.3% yield. If shareholders get the same special dividend again this year, that yield hits 7.6%.
The consensus forecast is for an 18.2% decline in earnings for 2013. Modest earnings growth is expected to return the year after.
As owner of a portfolio of world-class alcoholic beverage brands, Diageo is a true market leader.
With a dividend that has increased every year since 1998, Diageo has long been popular with income investors. Today, however, the shares trade at an all-time high. This rise has had the effect of pushing down Diageo's dividend yield. Even though a 10.5% dividend rise is expected for 2013, the shares would then yield only 2.8%. That's considerably less than the average yield of a FTSE 100 (UKX) company.
On the other hand, Diageo is by no means an average company. Diageo delivered growth throughout the worldwide economic downturn. In the last five years, sales have increased, on average, 7.5% a year. Earnings per share (eps) increased by 14.0% a year. In those five years, the shareholder dividend rose 5.9% per annum on average.
Diageo is expected to deliver 10.4% earnings growth for 2013.
3) British American Tobacco (BATS)
Smokers are well known for their brand committment. Cigarette consumption is also a strong habit/addiction for many smokers. This makes BATS's long-term sales very dependable.
These facts are a huge contribution to BATS's success as an investment. The company has been increasing its shareholder dividend every year since 1999. In the last five years, that income stream has been increasing, on average, by 17.7% per annum.
However, there are real signs that the tobacco industry will have things much tougher in the next 10 years than they did in the last 50. Worldwide legislation toward tobacco consumption is becoming increasingly restrictive. Swiss voters recently went to the polls to decide whether to introduce a ban on smoking in enclosed spaces. In Australia, unbranded packaging is about to be enforced.
Sales growth at BATS last year came in at 3.5%. Growth is expected to be even less this year. Investors need to ask themselves if BATS is a company worth paying 15.4 times forecast earnings for.
Since its disappointing trading update in January, Tesco has become one of the most debated FTSE 100 shares.
After having been top dog for a generation, there are growing signs that Tesco's lead is narrowing. Rival Sainsbury's (LSE:SBRY) market share has been increasing and premium supermarket Waitrose is also coming up fast.
Away from food, it is difficult to see how (or why) Tesco would wish to compete on home goods with Amazon. I did a quick price comparison on a 40-inch Samsung TV between the two stores. Despite an apparent £49 discount, Tesco Direct was still £107 more expensive.
Although brokers now expect earnings to fall marginally for 2013, the dividend is expected to rise (albeit very slightly). Earnings and dividend are expected to show better growth for 2014.
Can Tesco engineer an in-store turnaround? Will non-store initiatives (household goods, banking) be a success or an expensive failure? While Tesco's history is impressive, to me its future is less clear than it has been for a long time.
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> David does not own share in any of the above companies. The Motley Fool owns shares in Tesco.