I believe FTSE 250 incumbent Pennon (LSE:PNN) has great defensive capabilities. Here is why I would add the shares to my holdings.
Defensive stock
As a quick reminder, a defensive stock is a stock that is considered safer, especially in times of economic uncertainty, a bit like the current economic climate. This is because these stocks are expected to perform due to their essential nature and offering. Certain industries that are widely considered defensive include healthcare, utilities, and consumer staples.
Pennon is a UK-based water and environmental infrastructure business with operations in the UK, Europe, China, and other territories too. Despite operating via multiple segments, it makes most of its money through its water division.
So what’s happening with Pennon shares currently? Well, as I write, the shares are trading for 1,009p. At this time last year, the shares were trading for 1,148p, which is an 12% fall over a 12-month period.
Risks involved
One of the biggest risks to Pennon’s growth is regulation in the water industry. Water regulator Ofwat dictates how much water companies are allowed to charge customers. There has often been talk of tightening regulation, which could have a material impact on the performance of companies like Pennon. If performance were to be affected, investor sentiment and return could also be affected.
Pennon recently sold one of its businesses to streamline operations. The sale of waste company Viridor could be another factor that affects growth and returns in the longer term. This is because it loses some of its diversification. For example, if Ofwat tightened regulation on the water business and how much it could charge, it would need to look to boost performance via other avenues.
A FTSE stock I would buy
Due to recent macroeconomic and geopolitical factors, a stock market correction occurred. This led to many investors looking for safer defensive options. I believe Pennon fits the bill perfectly here. After all, water is an essential service in many developed countries and is a utility that many consumers and businesses must pay for. Furthermore, Pennon can benefit from a price rise each year in line with inflation and the retail price index here in the UK. This means Pennon should see performance and growth increase, unless regulation as mentioned above, is tightened.
Let’s take a look at Pennon’s performance then. I do understand past performance is not a guarantee of the future, however. Looking back, I can see that revenue has grown year on year for the past four years. In addition to this, it has recorded consistent profit for the past four years too.
Pennon shares would boost my passive income stream through dividends too. I am aware that dividends are paid at the discretion of the business and underpinned by performance. This means they can be cancelled at any time. Pennon’s current dividend yield stands at 3%. This is higher than the FTSE 250 average of 2%.
Overall I believe Pennon could be a great addition to my holdings with its defensive capabilities and growth prospects too. I would add the shares to my holdings and keep them for the long term.
