Every portfolio needs a sold ‘backbone’ of defensive stocks with a predictable outlook, which can be relied upon to provide a steady income during times of market turbulence.
National Grid (LSE: NG), SSE (LSE: SSE) and Centrica (LSE: CNA) are three such backbone companies. In fact, all three companies have bond-like qualities, making them perfect investments even for the most risk-adverse investor.
That said, Centrica is currently trying to turn itself around, following a period of lacklustre business performance. However, the company has all of the tools at its disposal to instigate a successful turnaround while maintaining its dividend payout to investors.
Restructuring for growth
The primary nature of Centrica’s business is the generation and supply of gas and electricity to UK homes, a relatively stable and predictable business. The company has recently run into trouble with its upstream business, which is suffering from the weak oil price environment.
As a result, Centrica’s management is now looking to refocus growth efforts on customer-facing activities. £1.5bn of capital from the group’s upstream business that focuses on exploration, production and power generation, is being diverted towards downstream, customer-facing operations such as British Gas. Management is looking to cut day-to-day group costs by £750m between 2015 and 2020. 6,000 jobs will go at the company’s upstream arm as part of these changes.
I believe management’s decision to scale back Centrica’s upstream business is a great move for the company. Oil & gas production is a notoriously volatile and capital intensive business. Focusing on the more predictable customer-facing side of the business should put Centrica back on the path to sustainable long-term growth. Moreover, Centrica’s focus on the more predictable customer side of the business will help support the company’s dividend.
After slashing the dividend payout by 30% earlier in the year, Centrica’s payout of 12p per share now sits at a more sustainable level. The payout is now covered one-and-a-half times by earnings per share. At present, the company supports a dividend yield of 4.4%.
A better pick
Like Centrica, SSE is also selling of low return assets in favour of assets that generate a high return on investment and boost shareholder returns. And SSE is, broadly speaking, a stronger company than Centrica. A conservative growth strategy has helped the group perform well in a difficult trading environment.
For the past five years, SSE’s revenue has grown at compound annual growth rate of around 8% per annum, although earnings per share have slipped by 10% since 2011. Similarly, National Grid’s earnings per share have chugged steadily higher by 3.3% per annum since 2011. Additionally, over the same period, shareholder equity has expanded by 33%, and book value per share has grown at a compound annual growth rate of 13.5% per annum since 2010.
In other words, National Grid and SSE have both created a significant amount of value for investors’ during the past five years. SSE and National Grid’s shares have produced a total return of 15.0% and 15.8% per annum respectively since 2010.
The bottom line
So overall, SSE, National Grid and Centrica are three defensive investments that would sit well in almost any portfolio.
But don't just take my word for it. I strongly recommend that you do your own research before making a trading decision -- you may come to a different conclusion.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.