Should I buy this FTSE 250 defensive stock?

Jabran Khan is looking for defensive stock options for his holdings and delves deeper into this FTSE 250 food manufacturing business.

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I am on the lookout for defensive stocks to add to my holdings. Let’s take a closer look at FTSE 250 incumbent Premier Foods (LSE:PFD).

Food manufacturer

Premier Foods is one of the UK’s largest listed food businesses, employing over 4,000 employees across 16 locations. It produces and sells many different types of food including flavourings and seasonings, sauces, snacks, soups, and many more. Some of its best known brands are Mr Kipling, Ambrosia, Bird’s Custard and Oxo, to name a few.

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So what’s the current state of play with the Premier share price? Well, as I write, the shares are trading for 120p. At this time last year, the shares were trading for 109p, which is a 10% increase over a 12-month period. In contrast to this, the FTSE 250 index has fallen 10% in the past 12 months.

For and against buying the shares

FOR: I believe Premier Foods possesses defensive qualities. In times of economic uncertainty like now, due to soaring inflation and rising interest rates, essential items such as food will still be necessary. Premier has the profile, presence, and brand power to be able to continue to perform well, in my opinion.

AGAINST: Due to the macroeconomic issues mentioned, Premier Foods may see its profit margins being squeezed. Soaring inflation has led to a rising cost of raw materials. Some of these raw materials are essential to producing food. If the cost of production is going up, profit could be affected unless prices increase. If prices increase, Premier may lose custom to competitors. All these factors could affect performance and investment viability.

FOR: I always look at performance, so let’s see what’s been happening with Premier recently. It released a preliminary update for the year ending 2 April 2022 just last week. Revenue fell slightly but profit before tax and earnings per share increased. In addition to this, it managed to decrease its debt levels, which is always a good sign in my eyes. It also declared a dividend of 1.2p per share, up from last year’s dividend of 1p per share. It is worth remembering that dividends can be cancelled at any time.

AGAINST: The current cost of living crisis in the UK has led to many consumers looking for more bang for their buck. The rise of budget supermarkets such as Aldi and Lidl has had a material impact on the more established brands in the UK. With seemingly no light at the end of the tunnel for the current crisis, more customers could move away from the established brands that Premier offers, and towards lower priced alternatives. This could affect performance and investment viability.

A FTSE 250 stock I’d buy

I like the look of Premier Foods for my holdings and I would happily add the shares at current levels.

I believe Premier’s defensive qualities will help maintain steady performance in the face of economic headwinds. In addition to this, the shares look cheap on a price-to-earnings ratio of 12 at current levels. The shares also pay a dividend which would boost my passive income stream.

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Jabran Khan has no position in any of the shares mentioned. 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.

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 considered, so you should consider taking independent financial advice.

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