The coronavirus pandemic is scary! The stock market plunge made many investors panic too. So, the key question is where a defensive investor should invest now.
I recently talked about buying stocks for aggressive investors. In this article I’ll talk about defensive investing during this stock market crash.
What is defensive investing?
Defensive investing involves buying shares in sectors that tend to flourish even during recessions. People still spend on healthcare, food, and other consumer staples, as well as utilities, no matter what is going on in the world. Large FTSE 100 companies operating in these sectors are normally resistant to the effects of a stock market crash.
Consumers staples trade at a discount due to the pandemic
Food is clearly a necessity. Online retailers delivering food and personal hygiene items are experiencing record sales due to the coronavirus situation. The largest delivery companies in the UK are Just Eat Takeaway and Ocado. Yet, the accounting fundamentals of these companies are not that good. Both of the companies reported losses in 2019. However, Ocado’s shares are still trading near record highs.
I’d rather focus on profitable, well-established companies like Associated British Foods. This food manufacturer is also exposed to the healthcare sector. Needless to say, the customers, supermarkets, and pharmaceutical companies that it supplies are flourishing at the moment.
Associated British Foods shares are trading at a price-to-earnings (P/E) ratio of 16.66, which is not expensive for a defensive company. It also pays a reliable and safe dividend of 46.35 pence per share, giving it a dividend yield of 2.51%.
Top utilities to buy at the market plunge
Like food, the demand for utilities is steady even during economic downturns. Yet, shares in utility companies tend to be available at discounts in a stock market plunge. One of the biggest utilities companies in the UK is SSE, second only to National Grid.
SSE provides UK households with gas, electricity, and telecommunication services. I would prefer SSE over National Grid because of the two companies’ financial fundamentals. SSE is trading at a P/E ratio of 8.39 as opposed to National Grid’s 19.21. SSE’s dividend yield of 7.97% comes with a dividend cover ratio of 1.50. National Grid’s yield of 5.58% comes with a cover ratio of 0.93, which is not at all sustainable.
Healthcare could flourish during the coronavirus pandemic
I am far from guessing which firm will be the first to develop the coronavirus vaccine. Developing and testing one is definitely a lengthy process. Yet, pharmaceutical companies now benefit from selling malaria and influenza drugs. For a defensive investor, it is a good idea to choose the one with superior accounting fundamentals.
I’d suggest choosing from among the FTSE 100 companies because they tend to be more financially stable than smaller ones. The two largest healthcare companies in the UK are Astrazeneca and Glaxosmithkline. Glaxosmithkline is trading at a P/E of 16.08, whereas Astrazeneca’s is 69.75. Astrazeneca’s earnings have substantially decreased in year 2019. Its shares yield 3.04%, but its dividend cover ratio is only 0.47. Glaxosmithkline’s 5.30% dividend yield comes with a cover ratio of 1.17. While both companies’ current ratios are below 1, I’d prefer Glaxosmithkline over Astrazeneca.
