Although the FTSE 100 has the potential to surpass 7,000 points over the medium term, it is not immune to short-term corrections. Therefore, it could be prudent to include relatively stable, defensive stocks with low betas in your portfolio since, in theory, they should outperform the wider index should there be short-term weakness in the wider stock market. Here are five shares that fulfil that criteria.
SSE
With a beta of just 0.4, SSE (LSE: SSE) is among the least volatile stocks on the FTSE 100. Certainly, it is more volatile than it perhaps should be, with the provision of electricity being a relatively stable endeavour. Indeed, political risk remains a significant factor for investors in SSE, since there is uncertainty regarding pricing and the role of the regulator after next year’s general election. Despite this, the current valuation appears to take into account above-average political risk, with shares currently trading on a price to earnings (P/E) ratio of 13.1, versus 14.2 for the FTSE 100.
ABF
ABF (LSE: ABF) has enjoyed significant success in recent years, with its clothing brand, Primark, performing exceptionally well. However, there is much more to the business, with ABF producing a wide range of typically stable and defensive products that aren’t as subject to the ups and downs of the business cycle as many other products are. Indeed, ABF produces a wide range of grocery brands (such as Twinings tea and Blue Dragon sauces), as well as having agriculture, sugar and ingredients divisions. Together, they have allowed ABF to grow profits in each of the last five years and, with a beta of 0.8, it could weather a market correction better than most.
National Grid
While SSE comes with a significant amount of political risk, National Grid (LSE: NG) offers investors a more straightforward investment. Certainly, there are frequent disagreements between National Grid and the regulator, but there is not the constant media focus on the company and its bottom line. Indeed, with a beta of 0.7 and a yield of 5.1%, National Grid should prove to be an attractive defensive play in the event that there is a market correction.
Wm. Morrison
While Wm. Morrison (LSE: MRW) is experiencing a challenging period at present, with the company struggling to grow its top and bottom lines, it could prove to be a strong defensive play. That’s because it has a low beta of 0.6 and offers investors a yield of 6.5%, which is expected to be fully covered by next year’s earnings. In addition, Wm. Morrison trades on a forward P/E of 12.6, which is less than the FTSE 100’s P/E of 14.2, which highlights that shares are relatively attractive at current levels and may not be hit too hard in a market pullback.
British American Tobacco
As one of the most stable industries (in terms of demand), tobacco stocks have always been looked upon as a ‘safe haven’ during times of distress. Indeed, British American Tobacco (LSE: BATS) seems to fit the defensive bill perfectly, with the stock having a low beta of 0.8 and offering investors an above-average yield of 4.1%. Furthermore, the company seems to be doing the right things with regard to e-cigarettes, in terms of not getting left behind a structural shift in the industry, while it continues to have significant scope to increase prices. This should provide stability in earnings going forward.
