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My top FTSE 100 defensive buys right now

Image source: Getty Images.

I’m keen on FTSE 100 firms with defensive businesses. Unlike more cyclical outfits, the defensives are less prone to the famine-and-feast trading induced by undulations in the wider economic cycle.

Defensive businesses tend to enjoy evergreen trading whatever the economic weather because their products or services have some kind of ‘essential’ element that consumers are reluctant to give up no matter how tough their finances become. Such steady demand often leads to steady incoming cash flows and steady dividend payments for shareholders too.

Share prices have been weak

We can find defensive firms in sectors such as utilities, pharmaceuticals, tobacco and fast-moving consumer goods among others. Over recent years, though, the attractions of such firms have led investors to drive their valuations up, because they are good investments to hold in uncertain times and when interest rates are low. We’ve seen the so-called ‘bond-proxy’ trade where investors have viewed the dividends from defensive firms as a good proxy for investing in bonds when those bonds and savings accounts are paying low interest rates.

However, with general interest rates on the rise again, the bond-proxy trade seems to be unwinding and many defensive stocks have been on the slide through 2017 and into 2018. Yet defensive stocks retain their attractions, and just recently there’s some evidence on many of their share-price charts that the severe falls may be over. The valuations are keener than they were and ‘right now’ could be a good time to look more closely at them. Here’s how they stack up against some common valuation indicators.

Company

Ticker

Market Cap (£bn)

Recent Share Price

Fwd P/E 2018

Fwd Dividend Yield 2018

Forward earnings growth 2018

AstraZeneca

AZN

64

5,063p

20

4%

(18%)

British American Tobacco

BATS

98

4,221p

14

4.8%

6%

Bunzl

BNZL

7

2,116p

17

2.3%

4%

Diageo

DGE

62

2,505p

22

2.6%

6%

GlaxoSmithKline

GSK

72

1,437p

13

5.6%

(4%)

Imperial Brands

IMB

24

2,488p

9

7.5%

0%

National Grid

NG

28

827p

14

5.7%

2%

Reckitt Benckiser

RB

44

6,150p

18

2.8%

5%

Sage Group

SGE

7

670p

20

2.5%

11%

Shire

SHP

33

3,589p

10

0.8%

8%

Smith & Nephew

SN

12

1,323p

19

2%

4%

SSE

SSE

13

1,291p

11

7.5%

5%

Unilever

ULVR

116

3,943p

19

3.5%

6%

British American Tobacco, GlaxoSmithKline, Imperial Brands, National Grid and SSE all offer high dividend yields and low-looking price-to-earnings ratios. But I think all of these firms are well worth your further research time.

Although the defensives tend to have stable underlying businesses, their valuations can swing in cycles as investor sentiment waxes and wanes. I don’t know if the current downward swing in valuations is over yet, but if the defensives keep falling, I think the value will become even more compelling.

One possible strategy is to put these stocks on your watch list with a view to picking up a few shares on the dips and down days. In the long run, I reckon dividend income and capital gains could come together to provide you with a decent total return on your investment.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended AstraZeneca, Diageo, Imperial Brands, Sage Group, and Shire. 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.