Two defensive dividend stocks for bargain-hunting investors

The recent market downturn has made these normally expensive non-cyclical stocks look incredibly attractive.

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Amidst the broader market sell-off of the past month, not even defensive stalwarts such as British American Tobacco (LSE: BATS) have been immune, with the world’s largest tobacco firm’s share price down a full 12% over the past four weeks.

This has left the company’s shares trading at just 14.2 times forward earnings, which I believe is an incredibly attractive price for what is a non-cyclical, high-yield stock that is still growing earnings at an impressive clip.

Now, it is true that BATS and other tobacco firms are grappling with major changes to tobacco consumption with developed markets continuing to see steady decreases in the number of smokers. However, with incredible pricing power, expansion into developing markets, the increasing uptake of next generation products and acquisitions, it is still growing at a great pace.

Over the past 10 years the company has averaged 4% annual revenue growth and 10% annual earnings per share growth thanks to these factors. I see little reason for this growth to slow as the company completes its acquisition of highly profitable Reynolds American and invests in high-growth, non-traditional tobacco products.

Another benefit of its business is its highly profitable nature with operating margins in H1 2017 reaching a fantastic 33%. Growing margins mean considerable cash flow for the business, which is being used both for investments in growth and increasing shareholder returns, with the company’s shares currently throwing off a respectable and growing 2.23% dividend yield.

With solid growth prospects, a healthy dividend and unimpeachable defensive characteristics, I view BATS’ current valuation as very, very attractive.

And one for the contrarians 

The past month has been even more unkind to consumer goods firm PZ Cussons (LSE: PZC) as its shares have dropped a full 15% in value due to both wider market problems and a rather uninspiring set of interim results.

But with its shares now priced at 16.9 times forward earnings, I think contrarian investors could find this defensive, diversified business an interesting option, especially compared to slightly more expensive peers Unilever and Reckitt Benckiser.

Cussons’ recent share price slide is mainly due to poor trading at its UK franchise, which is its most profitable region by far. Management has put the blame on an uncertain economic environment that caused shoppers to trade down for cheaper, non-branded personal care goods. This led operating profits in Europe to drop 6.4% year-on-year in constant currency terms.

On top of this, there were continued problems with Nigeria as operating profits from the group’s African operations dropped a whopping 62.8% in the six months to November. However, Nigeria’s economy has been in poor shape for years now with crippling inflation and a weak currency, so it’s little surprise that Cussons has suffered when converting Naira back to Sterling, its reporting currency.

That said, I see no reason for long-term investors to panic. These issues are external in nature and Cussons remains well-placed to benefit in the years to come from its high exposure to developing markets such as Nigeria and Indonesia. If UK consumer confidence rebounds and Nigeria’s economy recovers as oil prices rise, I reckon it could see a rapid turnaround in trading in the short term as well.

With great long-term growth prospects and a 2.9% dividend yield, I think PZ Cussons could be an attractive option for bargain-hunting investors.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK owns shares of PZ Cussons. The Motley Fool UK has recommended Reckitt Benckiser. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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