With stock markets jumping around lately, I have been looking for some defensive UK shares to buy now and hold in my portfolio. Here are three I would consider.
Vodafone
No matter what happens in the economy, I expect a lot of people will still want to use their phones and connect to the internet. That is one of the reasons I like the defensive qualities of Vodafone (LSE: VOD). The telecoms giant has large operations not only in the UK, but across Europe and Africa. That gives it a diversity of revenue streams that could help it if one of its markets suffers a particularly tough time.
I expect demand for telecoms to be buoyant and I think Vodafone is well-placed to benefit from it. Its brand and network are both assets that I think help give Vodafone a competitive advantage. One risk I see is the company’s debt pile. Net debt last year grew to €41.6bn. Paying that down could hurt the company’s ability to pay dividends. But the company is highly cash generative and has a dividend yield of 6.1%. The dividend and long-term growth prospects both make Vodafone attractive to me, even in a worsening economy.
British American Tobacco
The reason tobacco as an industry is seen as defensive is fairly obvious. The addictive nature of smoking means that many customers keep buying cigarettes even when times are tight and money gets scarcer.
I think British American Tobacco (LSE: BATS) benefits from that. But it also has some qualities of its own that help make it defensive. One is the quality of its premium brand portfolio. Owning names such as Lucky Strikes can help it keep customers loyal. The firm also benefits from a global spread of businesses.
Although many smokers keep buying cigarettes in a recession, a challenging economy could still pose risks for the company. Cost inflation on items from packaging to leaf tobacco could eat into profit margins. Like Vodafone, British American generates large cash flows and yields 6.2%. I am happy to own British American in my portfolio with the prospect of a recession looming.
National Grid
Another sector often talked about as being defensive is utilities. Water and energy use can be affected by the level of economic activity – but overall demand is likely to remain fairly resilient.
One share I would consider buying for my portfolio at the moment is energy network operator National Grid (LSE: NG). I see the company as having a large competitive advantage in the form of its existing infrastructure. No competitor would be able to build the same network from scratch cost effectively. That should help National Grid continue to post healthy profits in coming years. Last year’s profits topped £2bn.
The company’s sale of some gas assets increases its reliance on the electricity business. That concentration increases risks, for example, if there are new regulatory constraints on profits in the electricity sector. But the sharpened focus could also help the business, given the ongoing high demand for electricity.
With a 4.8% yield, National Grid looks like an attractive income share for me to consider owning in my portfolio.
