World markets remain unstable despite the recent rally in equities . Investors looking to park capital in stocks that should perform ok in a prolonged bear market should be researching defensive plays. Historically defensive stocks have been in the consumer, utilities and healthcare sectors. The three stocks below are perfect defensive stocks that should hold up well in a downturn.
Tobacco king
British American Tobacco (LSE: BATS) has been an outstanding performer since the year 2000, the share price has increased by a whopping 629% and the company has returned billions to shareholders in the form of dividends. The company manages to maintain margins of 30-36% and generate over £4bn in net profit each year.
Shareholders will see a substantial amount of this profit returned in a dividend of 154p a share (3.9%) which is covered 1.6 times by cash. The company is relatively cheap too — currently shares are trading on a P/E ratio of just over 17. This is lower than London’s other large tobacco stock Imperial Brands (LSE: IMB).
British American Tobacco is a great stock to own in times like these because of the defensive nature of tobacco companies and the huge profit the company has consistently delivered for years.
Pharma giant
GlaxoSmithKline (LSE: GSK) is an extremely popular defensive stock in the US and UK. The company operates in the healthcare sector and is expected to have revenues of over £25bn this year. Glaxo pays out a punchy 6% dividend and the shares still only trade on a P/E of 15, which is firmly in the bottom half of its peer group.
The strong defensive qualities can be seen when looking at a 10 year chart for the stock — impressively the stock rose in during the 2008/2009 global financial crisis. This would suggest that if the world economy enters another recession then Glaxo shares would be a great place to have invested.
The company has developed an exciting range of new drugs and treatments to help fill the revenue gap left by old treatments coming off patents. Although revenue is declining the company is keeping profits relatively steady, and the stock is definitely one to own in a downturn.
UK utility
Utility stocks such as Centrica (LSE: CNE) are not something I would usually look at. However, in the current economic climate the sector may well outperform others by the end of the year. The headline attraction to Centrica is the 5.3% dividend yield but there could be a good turnaround story here.
After two years of losses the company is forecast to swing into a profit for 2016 and 2017 which could cause the shares to re-rate. The forecast P/E ratio for 2016 is 12.5 which is a good deal lower than its listed peers and that is something that I would expect to change. Centric has defensive qualities like the other stocks mentioned here but there is also considerable scope for capital growth.
Centrica is reporting this week so that may give us some confirmation of the companies change in fortunes and the outlook going forward.
