While growth stocks may be among the more exciting companies in which to invest, defensive stocks also hold great appeal. For starters, their returns are more consistent, more reliable and, in the long run, can be surprisingly high. Furthermore, they provide balance for a portfolio so that, when things do go awry for the index and the economy, they should outperform the majority of growth stocks and help a portfolio to outperform the wider index.
Clearly, food production is a hugely defensive industry. That’s because it is one of the requirements of mankind and, even if the financial system melts down, we will all need to eat. As such, the likes of Devro (LSE: DVO) and Cranswick (LSE: CWK) should be able to better ride out an economic crisis than most of their index peers.
For example, in the last three months Devro’s share price has risen by 6% and Cranswick is up 14%, while the FTSE 100 has fallen by 3% as a result of considerable uncertainty regarding the possibility of a Grexit. And, as today’s results from Devro show, defensive stocks can deliver excellent growth numbers, with the food casings company reporting a rise in its pretax profit from £1.6m in the first half of last year to £9.6m in the first half of the current year.
The key reason for this rise was a reduction in exceptional costs, but Devro’s three year transformation plan is also having a positive impact on its financial performance, too. And, with there being strong growth potential from markets such as China, Japan and across south east Asia, Devro remains hugely well-diversified and this adds to its defensive appeal. Furthermore, Devro continues to invest in its business, with projects in the US and China likely to mean additional short term costs, but improved long term performance.
Looking ahead, Devro is forecast to increase its earnings by 6% in the current year and by a further 17% next year. Despite this positive outlook, it trades on a forward price to earnings (P/E) ratio of 18.6, which indicates that its shares offer growth at a reasonable price.
Similarly, Cranswick is expected to increase its bottom line by 6% in each of the next two years and, with it having been able to increase its earnings in each of the last five years, it too is a hugely reliable stock. Meanwhile, a forward P/E ratio of 15.9 also indicates good value for money.
While Devro and Cranswick have huge appeal, though, utility companies such as Centrica (LSE: CNA) and SSE (LSE: SSE) may be worth buying ahead of them. Certainly, they have endured a challenging recent past, with Centrica being hurt by a lower oil price and both stocks suffering from a considerably high degree of political risk. However, they appear to offer good value for money, with Centrica’s forward P/E ratio being 14.7 and SSE having a forward P/E ratio of just 12.8. As such, an upward rerating is a very real outcome over the medium term.
Furthermore, SSE and Centrica both offer considerably greater income potential than Devro and Cranswick. This improves their defensive appeal and means that, even if share price performance disappoints, an investor’s total return should be aided hugely by the 4.5% and 6% yields that Centrica and SSE, respectively, offer. And, while Devro and Cranswick offer decent yields of 2.9% and 2.2% respectively, the additional income appeal of Centrica and SSE makes them the preferred defensive options at the present time.
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Peter Stephens owns shares of Centrica and SSE. The Motley Fool UK has recommended Centrica. The Motley Fool UK owns shares of Devro. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.