If the market is crashing, I like stocks that do not march to its beat.
A stock’s beta tells investors how sensitive that stock’s price is to changes in the overall market. A stock with a beta of 1.6 is expected to rise by 1.6% if the market moves up by 1%. Or fall 1.6% if the market falls by 1%.
According to Yahoo Finance, Smith & Nephew (LSE: SN) has a beta very close to zero in relation to the FTSE 100, based on five years of monthly returns. Having a beta of zero does not mean there is zero investment risk. It means that historically, Smith’s share price has been driven by the ups and downs in its business. The ups and downs of the FTSE 100 have not had as much impact on Smith’s share price.
If Smith’s business is solid, then it might be just the right kind of stock to hold in the event of a market downturn.
Smith & Nephew designs, manufactures, and sells orthopaedic devices and wound care products. More people, who live longer and have better access to healthcare, means more medical procedures. More procedures mean more use of Smith’s products – so long as those products remain effective.
Revenue growth will likely continue to be steady but unspectacular. A growth profile like this fits with a company that is exposed to long-term demographic trends and reasonably stable healthcare spending.
The balance sheet at Smith looks strong. Over the last five reported full years, Smith’s current ratio has averaged 1.99. This means Smith can meet its current (less than one year) liabilities with its current assets with ample room to spare.
For a longer-term measure of balance sheet health, the five-year average gearing ratio of 36.5% is very encouraging. This means that for every 1$ of equity, Smith has borrowed 37 cents.
Smith has paid dividends on its ordinary shares every year since 1937. Investors will likely want this tradition to continue.
Smith reports its accounts and announces its dividends in US currency. Rather than making the conversion, I’ll just provide the numbers given in the financial report. Smith earned 80 cents per share over the last 12 months, enough to cover its dividend of 36 cents per share 2.22 times over. This degree of coverage is good.
Cash flow per share has been 3.22 times greater than dividends per share on average over the last five reported full years. Again this degree of coverage is good.
The trailing-12-month dividend yield of 1.53% is low in comparison to others. However, there is good evidence of high quality and sustainable dividends at Smith.
Be aware that because Smith declares its dividend in dollars and cents but pays in pounds and pence, the exchange rate between the two will determine the actual dividend received by UK investors.
Overall, Smith looks like an excellent candidate to help cushion a portfolio if the stock market does crash. Its stock price has not shown a high correlation with the overall market.
Its business model and dividends look sustainable. It would make sense in a portfolio looking for income and some price appreciation over the long term, and not just as a guard against panic in the markets.
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James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.