How well did 'classic defensives' do in the latest bear market?
Some companies' earnings are less dependent on the state of the economy than others. Companies in so-called 'defensive' sectors are better able to cope in a recessionary environment because they supply things people cannot do without.
Key defensive sectors are:
- Food Producers;
- Food Retailers;
- Personal and Household Non-durables;
- Utilities;
- Pharmaceuticals; and
- Tobacco.
Historically, share prices in these sectors have tended to hold up relatively well in major downturns. They've also been some of the most reliable dividend-payers.
Testing time
The FTSE 100 closed at 6,731 on 12 October 2007. By 6 March 2009 it had fallen to 3,531. A drop of 48% in just under eighteen months.
So, how did defensive companies measure up? I've picked out companies from each sector -- not all the companies in the sector but some of the biggest and best-known names. For simplicity, the figures exclude dividends.
Food Producers
| Company | Price (p)
12/10/07 | Price (p)
6/3/09 | Change
(%) |
|---|
| Unilever (LSE: ULVR) | 1,609 | 1,266 | -21.3 |
| Cadbury (LSE: CBRY) | 602.5 | 503.5 | -16.4 |
| Average | | | -18.9 |
Mainstream food producer Unilever and comfort-food specialist Cadbury saw their value drop by less than half that of the FTSE 100.
Food Retailers
| Company | Price (p)
12/10/07 | Price (p)
6/3/09 | Change
(%) |
|---|
| Tesco (LSE: TSCO) | 475 | 308 | -35.2 |
| Sainsbury (LSE: SBRY) | 583.5 | 294.5 | -49.5 |
| Morrison (LSE: MRW) | 297.3 | 239.8 | -19.3 |
| Average | | | -34.7 |
Food retailers did less well than producers. With the rise of aggressive value chains such as Lidl and Aldi investors feared retailers rather than producers would bear the brunt of margin pressures. The supermarkets' aggregate performance was only modestly better than the FTSE 100's and the fall in the share price of 'upmarket' Sainsbury was actually worse.
Personal and Household Non-durables
| Company | Price (p)
12/10/07 | Price (p)
6/3/09 | Change
(%) |
|---|
| Reckitt Benckiser (LSE: RB) | 2,908 | 2,507 | -13.8 |
For Personal and Household Non-durables think soap, toothpaste, washing powder -- all those toiletries and home cleaning products that get used and replaced again and again. Clearasil-to-Cillit Bang maker Reckitt Benckiser handsomely outperformed not only the broad market but also most other defensive companies.
Utilities
| Company | Price (p)
12/10/07 | Price (p)
6/3/09 | Change
(%) |
|---|
| National Grid (LSE: NG) | 780.5 | 570.5 | -26.9 |
| Centrica (LSE: CNA) | 383 | 245.5 | -35.9 |
| Scottish & Southern Energy (LSE: SSE) | 1,528 | 1,090 | -28.7 |
| United Utilities (LSE: UU) | 735.5 | 467.5 | -36.4 |
| Average | | | -32.0 |
Utilities across the spectrum of gas, electricity and water outperformed the FTSE 100, but only by a relatively modest amount. Investors' appreciation of the defensive qualities of regulated businesses was tempered by fears that in the prevailing mood of this particular recession the government might just meddle with utilities to the disadvantage of shareholders.
Pharmaceuticals
| Company | Price (p)
12/10/07 | Price (p)
6/3/09 | Change
(%) |
|---|
| GlaxoSmithKline (LSE: GSK) | 1,280 | 1,022 | -20.1 |
| AstraZeneca (LSE: AZN) | 2,580 | 2,147 | -16.8 |
| Average | | | -18.5 |
Big drug companies showed their resilience once again. Pharma titans GlaxoSmithKline and AstraZeneca posted a return similar to that of the food producers.
Tobacco
| Company | Price (p)
12/10/07 | Price (p)
6/3/09 | Change
(%) |
|---|
| British American Tobacco (LSE: BATS) | 1,748 | 1,674 | -4.2 |
| Imperial Tobacco (LSE: IMT) | 2,009 | 1,533 | -23.7 |
| Average | | | -14.0 |
The 'evil weed' may not be to everybody's taste, either as a consumer or an investor, but there is no doubting the defensive qualities of a product that is highly addictive. British American Tobacco and Imperial Tobacco both outperformed the FTSE 100, the former dropping a mere 4.2%, making it the top performer in my sample.
What to expect from defensive companies
Classic defensives won't protect your capital entirely in a vicious downturn, but the 2007-09 bear market has shown once again that they are great for avoiding the worst of the misery. Note that the above companies also churned out dividends right through the period.
But don't expect defensives to lead the field when markets turn up. As we've seen in the rebound since March, the big winners have been the 'cyclicals' whose share prices fell hardest in the bear market.
Time, not timing
Getting out of equities before markets crash and piling into distressed cyclicals at the bottom is a seductive idea; but attempting to time the market is not our Foolish way. Nobody can call it right consistently. Just read what the experts are saying today about where the market is headed next and you'll find plausible arguments for up, down and sideways.
The percentage play is to be in the game -- and in it for the long-term. As Sir John Templeton, one of the investment greats, said: "History suggests it is not timing which matters, but time."
If you are happy to take the big ups and downs of the stock market in your stride, a cheap index tracker will fit the bill. But if you want exposure to equity returns with some downside protection then a decent spread of companies from the classic defensive sectors provides a solid core for a portfolio for all seasons.
More on blue chip shares:
The author owns shares in Unilever, Tesco, Morrison, Reckitt Benckiser, National Grid, Centrica, Scottish & Southern Energy, United Utilities, GlaxoSmithKline and AstraZeneca.
