Yesterday, I gave some tips on how private investors might deal with a market crash. One suggestion was proactive rather than reactive: assume a meltdown is around the corner and get your portfolio in order so it won’t affect your ability to sleep when it arrives. As part of that I think it might be a good idea to increase your exposure to companies operating in defensive industries.
Here are three of my favourites from the FTSE 100.
Steady income
With the threat of nationalisation under a Jeremy Corbyn-led government now eliminated, it’s no surprise that power provider National Grid (LSE: NG) is back in favour with investors looking for reliable blue-chip stocks.
The only drawback to buying a slice now is that it’ll cost you more. A 20% increase in its share price since Boris Johnson’s election victory means the £37bn cap now trades on 18 times earnings. That’s not expensive compared to, say, your average tech play, but it’s quite rich for what is, to be frank, a rather dull company with fairly limited growth prospects.
Of course, one could say that this is a price worth paying for stability. Moreover, the Grid remains a great source of income. In the current financial year, for example, analysts are predicting a total cash return of 48.7p per share. Based on the current share price, that gives a yield of 4.6%.
All-weather stock
As industries go, I think you’d struggle to find one more defensive than healthcare. Regardless of whether the economy is thriving or not, people will always require drugs and medical treatment.
This fact makes owning a pharmaceuticals giant look prudent if you suspect a crash is on the cards. Of the two that feature in the FTSE 100 — GlaxoSmithKline (LSE: GSK) and AstraZeneca — I’d probably opt for the former, even if it’s in the process of splitting out some of its operations following its consumer healthcare joint venture with Pfizer. That JV is called GSK Consumer Healthcare and it intends to de-merge it from its main ops within three years and to list it.
Although Astra has a more impressive pipeline of drugs, Glaxo’s shares are significantly cheaper at 14 times earnings (compared to Astra’s 24).
The latter’s income credentials are also better. It’s expected to pay out 80p per share in 2020, which converts to a 4.8% yield. Its top tier peer yields 2.8%.
Temporary weakness
A third stock worth holding, in my opinion, is beverage giant Diageo (LSE: DGE) — owner of popular brands such as Johnnie Walker whisky and Smirnoff vodka. In contrast to National Grid and Glaxo, its share price has been on a downward trajectory of late thanks to concerns over slowing sales growth.
I don’t think holders should be unduly concerned by a period of stodgy trading. While there’s no way of knowing for sure how long this selling pressure will continue, we can be confident that global demand for premium alcoholic drinks won’t evaporate. Indeed, the low price of Diageo’s spirits relative to other discretionary items means that spending on this kind of item is likely to be fairly steady if the economy wobbles.
Diageo’s shares trade on 23 times earnings, making it the most expensive of the three mentioned today. At 2.3%, it also offers the lowest prospective yield. For the geographical diversity it offers, however, I still rate the shares as a ‘buy’.
