We can’t know when the next market correction will come. But with equity valuations reaching perhaps uncomfortably heady levels, domestic economic growth weak at best and the Brexit process waiting in the wings to foil market bulls, it never hurts to be prepared for the next 10% or more drop in equity markets.
With that in mind, one of my favourite defensive stocks out there is drinks maker Britvic (LSE: BVIC). The maker of Robinsons and bottler of Pepsi products in the UK offers nervous shareholders the ability to grow sales throughout the business cycle due to selling relatively low-cost products that consumers feel they can afford throughout the economic cycle.
Indeed, Britvic handily increased sales and profits every single year from 2008 to 2010 during the midst of the worldwide financial crisis. Looking ahead, there’s good reason to believe the firm can perform equally well during any future economic downturn that might knock equity markets, thanks to a business that is considerably more global and diversified than it was almost a decade ago.
On top of bulking up in previously under-emphasised markets such as Brazil and the USA, Britvic also offers a very nice 3.36% yield that is safely covered 1.5 times by earnings and is sure to attract attention during any downturn. Furthermore, net debt of 2 times EBITDA at year-end is a healthy level for such a defensive business with growing cash flow, so investors needn’t worry about any cash crunch ahead.
With a sane valuation of 14.8 times forward earnings, a hearty dividend and great defensive attributes, I reckon Britvic is just the sort of non-cyclical stock that could fare better than the market at large during any correction.
As safe as they come?
A larger option for investors is pharmaceutical giant GlaxoSmithKline (LSE: GSK). GSK is perhaps best known for its cutting-edge treatments, but in recent years has also built up a considerable consumer health business that sells mundane-but-necessary items from paracetamol to plasters and toothpaste.
It goes without saying that these are exactly the sort of products that consumers need to buy whether the FTSE 100 is at 8,000 or 4,000. Add in a new generation of drugs that are just coming to market, and GSK’s management team has a slew of products in its portfolio that are always in high demand.
Now, there are questions as to GSK’s future strategy as many City analysts would prefer the group to slim down and focus solely on the highly profitable drugs for which it is known. This doesn’t appear likely to happen any time soon with new CEO Emma Walmsley coming from that side of the business, but it could become a more likely occurrence if GSK’s share price continues to lag that of more drug-focused peers.
But at the end of the day, it offers nervous investors considerable defensive characteristics, a hearty 5.91% dividend that is once again covered by earnings and a valuation of 12.2 times forward earnings that is far from ridiculous given its strong growth prospects.
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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Britvic and 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.