3 Defensive Bargains To Protect You From A Greek Exit: National Grid Plc, GlaxoSmithKline Plc & British American Tobacco Plc

Some might say that it has been a long time coming, but it is looking increasingly likely that Greece is standing on the brink of default, coupled with the possibility of ejection from the Euro. The FTSE 100 is well off its recently achieved highs, too, as investors try to predict which way this story is going to end.

There are no bones about it: clearly, Greece is insolvent and, arguably, needs to default. Only then can it move forward. By prolonging the pain, it is not doing anyone any favours; indeed, in the end, it seems to be simply putting off the inevitable… how long can the can be kicked down the road?

Some might say that the market has priced this eventuality in. I suspect that is not the case: I wouldn’t be surprised to see plenty of volatility as events unfold. I wouldn’t rule out a market rally whichever way things turn out. One thing is clear, however: the sooner the situation is resolved, the sooner the market can move on to worrying about something else.

Whilst all this noise can be deafening at times, it is sometimes useful to seek out some defensive plays that can offer some protection to your portfolio. As it happens, I have three suggestions that I think fit the bill:


GlaxoSmithKline (LSE: GSK) is currently in the process of working through the Novartis deal announced last year.

Mr Market is currently a little uncertain regarding the strategic review coupled with the fact that the dividend is being held at 80p per share over the next three years. Additionally, the proposed return to shareholders of £4 billion of proceeds from the Novartis transaction was reduced to £1 billion. This will be paid in the fourth quarter along with the final dividend. Whilst this creates more breathing room for the company, the market was disappointed by the news.

At current prices, though, investors know that they have a rather safe 6%+ yield for the next three years.

That’s not a bad return whilst we wait for the strategic review to work through the company. Whilst some might argue that the lack of growth makes Glaxo unattractive, I believe that dividend growth could well resume in 2017 should the company’s strategy play out as expected — it should be in a stronger financial position, allowing it to resume growing the dividend.

Going forward, the company intends to target emerging markets for much of the company’s growth, with an increased focus on vaccines and consumer healthcare. Helpfully, the vaccines business grew sales by 10% and revenue is forecast to grow at a CAGR (compound annual growth rate) of mid-to-high single digits out to 2020. This is an area the firm has invested in increased manufacturing capacity in anticipation of strong demand for its products.

National Grid

Another mega-cap, seemingly in the doldrums, is National Grid (LSE: NG). The shares seem to have suffered following a number of brokers maintaining their neutral stance after the company announced its final results in May. I believe that the fall has been overdone, and the shares are currently changing hands on a forward PE ratio of a little over 14 times earnings and forecast to yield over 5%

Personally, I think investors should note the defensive qualities of the sector – after all, householders and businesses need to keep the lights on and the country’s ageing infrastructure needs to be updated. While energy suppliers need to remain competitive to avoid excessive customer churn, National Grid knows that it will be getting paid by whoever supplies the gas or electricity that runs through its infrastructure.

Last But Not Least…

Sometimes investors need to hold their nose before investing in some sectors. For some, British American Tobacco (LSE: BATS) is one of those investments.

If, however, you can bring yourself to take a look at this company and its metrics, you may be surprised at what you get for your money.

This company boasts excellent quality metrics:

  • ROCE = 26.1%;
  • ROE = 51.3%;
  • Operating margin = 32.5%.

Personally, I think that the shares priced at around 16 times forward earnings and yielding over 4% are at least worth a second look. Like them or loathe them, they have defensive qualities and quality metrics that many listed companies can only dream of.

Final Thought.

If I’m honest, I think that investing based on the ever-changing macro picture can be a costly game: one should try to look for stocks of good companies trading on reasonable valuations, rather than worry about which way Greece will go in the short term.  Instead of trying to second-guess the market, try to pick companies that allow you to sleep at night.

However, the market can sometimes throw up good buying opportunities as investors sell off good stocks purely because the macro situation may change.  Sometimes it can pay to keep watch.

As the market wobbles, overreactions to the perceived macro story can be your friend when looking over the long term and investing in strong defensive companies who provide essential goods, products and services used by some or all of us every day.

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Dave Sullivan has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.