2 FTSE 250 safety shares I’ve got my eye on

These two FTSE 250 (INDEXFTSE:MCX) stocks could be attractive investments, says G A Chester.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When we look for defensive stocks — that’s to say businesses whose prospects aren’t heavily dependent on the performance of the wider economy — our first port of call tends to be the blue-chip FTSE 100 index.

Companies such as National Grid, British American Tobacco and GlaxoSmithKline are classic defensive picks. And, indeed, are fine core holdings for a portfolio.

However, there are some businesses in the second-tier FTSE 250 that also have excellent defensive credentials. Furthermore, they offer valuable diversification in that they operate in sectors that simply aren’t represented in the top index.

Market leader

Shares of Dignity (LSE: DTY) have moved higher today after a Q1 trading update this morning. At a price of 2,700p, this provider of funeral-related services has a market cap of £1.35bn.

You won’t find a business in this industry in the FTSE 100. In fact, Dignity is the only company from the sector listed on the London stock exchange. While it isn’t big enough for the top index, it is, nevertheless, the UK’s largest operator. The fact that it’s the market leader — in what is a fragmented industry — adds to the investment appeal in my book.

Performing well

The company today reported “a strong start to the year, with all parts of the business performing well” — these being funeral homes (68% of group revenue), crematoria (22%) and pre-arranged funeral plans (10%).

At the current share price, Dignity trades on a trailing price-to-earnings (P/E) ratio of 22.5. This is only modestly higher than the P/E of 21.2 for the FTSE 250 as a whole and is a premium that I believe could be worth paying for a unique defensive business.

On the face of it, the dividend yield of 0.9% on last year’s payout of 23.59p is distinctly underwhelming. However, historically, the company has delivered hefty additional returns of cash to shareholders from time to time, including a 120p-a-share payout in 2014. I expect such ‘extras’ to continue in future, making the income prospect rather more attractive than implied by the running 0.9% yield on the ordinary dividend.

Two strings to its bow

Water utility Pennon (LSE: PNN) is another FTSE 250 stock that offers defensive diversification outside of the FTSE 100. It’s true there are regulated water businesses in the blue-chip index, in the shape of Severn Trent and (the misnamed) United Utilities, but Pennon offers something that its larger peers don’t possess.

The £3.62bn FTSE 250 company is really two businesses: South West Water and waste management firm Viridor. Admittedly, Viridor is somewhat attuned to the performance of the wider economy (as shown by recent problems with one contract) but the two strings to Pennon’s bow also have advantages.

Worthy of consideration

At a current share price of 870p, Pennon’s running dividend yield of 3.93% compares favourably with United Utilities’ 3.76% and Severn Trent’s 3.33%. Furthermore — and partly due to the earnings contribution expected from Viridor — Pennon’s dividend policy is to increase the annual payout by 4% above RPI inflation through to 2020. United Utilities and Severn Trent are only offering increases that at least match inflation over the same period.

I wouldn’t necessarily shun the blue-chip pair, but Pennon appears worthy of consideration on account of its attractive dividend prospects and a not-unreasonable trailing P/E of 21.8.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

The Anglo American share price soars to £25, but I’m not selling!

On Thursday, the Anglo American share price soared after mega-miner BHP Group made an unsolicited bid for it. But I…

Read more »

Investing Articles

Now 70p, is £1 the next stop for the Vodafone share price?

The Vodafone share price is back to 70p, but it's a long way short of the 97p it hit in…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

If I’d put £5,000 in Nvidia stock at the start of 2024, here’s what I’d have now

Nvidia stock was a massive winner in 2023 as the AI chipmaker’s profits surged across the year. How has it…

Read more »

Light bulb with growing tree.
Investing Articles

3 top investment trusts that ‘green’ up my Stocks and Shares ISA

I’ll be buying more of these investment trusts for my Stocks and Shares ISA given the sustainable and stable returns…

Read more »

Investing Articles

8.6% or 7.2%? Does the Legal & General or Aviva dividend look better?

The Aviva dividend tempts our writer. But so does the payout from Legal & General. Here he explains why he'd…

Read more »

a couple embrace in front of their new home
Investing Articles

Are Persimmon shares a bargain hiding in plain sight?

Persimmon shares have struggled in 2024, so far. But today's trading update suggests sentiment in the housing market's already improving.

Read more »

Market Movers

Here’s why the Unilever share price is soaring after Q1 earnings

Stephen Wright isn’t surprised to see the Unilever share price rising as the company’s Q1 results show it’s executing on…

Read more »

Investing Articles

Barclays’ share price jumps 5% on Q1 news. Will it soon be too late to buy?

The Barclays share price has been having a great time this year, as a solid Q1 gives it another boost.…

Read more »