We’re less than a month into 2016, and there are already signs that this year could be one of the most volatile on record for investors. And with this being the case, it looks as if defensive stocks are set to be the best assets to buy for 2016. Vodafone (LSE: VOD), BT (LSE: BT.A) and SKY (LSE: SKY) all have attractive qualities as defensive stocks.
Indeed, over the years, this trio has proven time and again that investors can rely on them to provide capital growth and income, even in the most turbulent markets.
For example, over the past 10 years, Sky’s shares have outperformed the wider FTSE 100 by 100%, while BT’s shares have outperformed the UK’s leading index by more than 110%. Vodafone’s shares have lagged those of Sky and BT if you exclude income, but seeing as returning cash to investors is a major part of Vodafone’s strategy, it wouldn’t make sense to publish the company’s returns without including dividend payouts.
Including dividends, Vodafone’s shares have returned 5.5% per annum over the past decade. BT’s shares have returned 9% per annum over the last 10 years, and Sky’s shares have returned 10% per annum. Over the same period, the FTSE 100 Total Return Index’s annual return has been approximately 2% including both dividends and capital growth.
Set to continue?
The fundamental question is: are these returns set to continue? Well, BT, Vodafone and Sky have been able to outperform the market because their businesses are surrounded by a wide moat, and there are few (if any) serious competitors to their dominance.
What’s more, over the past two years or so, these three multimedia giants have been taking steps to increase their diversification and dominance over key markets. For example, Sky has consolidated its European operations, giving the company more firepower to attract customers and to widen profit margins. BT has continued to reinvest in its pay-TV offering and will complete the acquisition of mobile network EE shortly, while Vodafone has spent billions redeveloping its European infrastructure to offer both new and existing customers the best experience possible.
All three operators are already starting to realise the benefits of these strategies. City analysts expect Vodafone, BT and Sky to all report profit growth this year, growth that should help these companies outperform the wider market.
Those analysts expect Sky to report earnings per share growth of 13% for 2016. The company’s shares currently trade at a forward P/E of 17.7 and support a yield of 3.2%.
BT’s earnings per share are expected to fall this year due to the higher number of shares in issue following last year’s rights issue. However, the company’s underlying pre-tax profit is expected to increase by 19%. BT’s shares currently yield 2.9%.
Vodafone’s earnings per share are also set to fall this year, but pre-tax profit is set to double. Next year, earnings per share are set to jump by 20%. The company’s shares currently trade at a forward P/E of 38.7 and support a yield of 5.3%.
