The UK stock market is in for a rough ride in the next month leading up to the EU referendum on 23 June. It’s absolutely key to prepare your portfolio for the volatility expected and both possible outcomes.
Today I’m looking at two defensive heavyweights Imperial Brands (LSE: IMB) and AstraZeneca (LSE: AZN).
Tobacco king
The newly-named Imperial Brands has performed excellently over the years in the face of slowing tobacco demand. The company recently released impressive half-year results that CEO Alison Cooper described as “a strong first half performance”. The results included Imperial’s newly-acquired US brands, which have boosted its US market share to 9.3%. In the face of a 3.1% fall in tobacco sales volume the company managed a 21% increase in earnings per share and boosted the dividend by over 9% to 47p a share.
Imperial has also moved towards the e-cigarette market, this is particularly encouraging as more and more smokers are moving to the ‘healthier’ e-cigarettes. The company also has growth brands such as Winston and Kool, which are gaining market share in the US and should provide growing revenues well into the future.
Imperial is a classic defensive play and should hold up well during increased periods of market volatility. To add to the defensive qualities, the business is performing well and consistently delivering on all its strategic goals. Add in the 3.8% dividend yield and I think Imperial is a great core holding for any portfolio.
Exciting pharma
Another classically defensive industry is the pharmaceutical sector. AstraZeneca has been under pressure for a few years now due to falling revenues and earnings caused by blockbuster drugs coming off patents. However, this is all about to change as AstraZeneca has one of the most exiting drug pipelines in the industry. This potential was indicated when US giant Pfizer came after AstraZeneca a few years ago with a 5,500p offer.
The company pays a chunky 5% dividend and with earnings set to rise from next year there could be some nice dividend increases to come. The 2016 price-to-earnings ratio is an attractive 13 times, which indicates the stock is somewhat undervalued. The company spends nearly 25% of revenue on R&D which ensures Astra keeps the pipeline of new drugs full.
AstraZeneca offers a unique investment case due to its strong defensive qualities but also the scope for earnings growth in medium term. There’s also potential for Pfizer or another US pharma giant to return and buy AstraZeneca. I’m not sure management would be so quick to dismiss an offer second time around.
As the EU referendum in the UK approaches, every investor should be looking at their portfolio and ensuring there are some defensive holdings. Imperial Brands and AstraZeneca are two defensive stocks that should hold up well if the UK votes for Brexit. Importantly, both companies offer medium-term growth prospects, which is rare for defensive stocks.
