In a market downturn, defensive stocks are a safe option. Why do I consider food manufacturing to be a good defensive option in these uncertain times? Food items are considered essential, as people are unlikely to cut back on them. Food manufacturing companies will continue to operate, albeit with social distancing in place. During the lockdown, demand on supermarkets has increased massively, which will have benefited the manufacturers as well.
Two food manufacturing stocks I currently like the look of are Cranswick (LSE:CWK) and Associated British Foods (LSE:ABF).
Defensive stock #1
Cranswick is now recognised as a leading UK food producer after originally starting as a pig feed business. It has also increased its non-meat product range and possesses a thriving export business.
Food sales have gone through the roof due to the pandemic. Cranswick is up close to 10% in 2020. It did suffer a small dip when the market crashed but has since recovered. It currently trades at just over 3,720p per share.
Cranswick has delayed releasing its full-year results (to 31 March) until 23 June. In a trading statement back in January, the company had announced that it was expecting higher-than-forecast profit for the full year.
Cranswick has a good record of acquisitions through the years. This is something that always interests me as an investor, as it means a company is looking to expand its reach and operations. Since 2001, Cranswick has made over 10 separate acquisitions.
In recent years, Cranswick’s revenue, profit, and dividend per share have increased year on year, which is positive. Its current dividend yield stands at a respectable 1.5%. A price-to-earnings ratio of close to 25 is high but a price-to-sales ratio of 1.3 indicates good value to me overall. With defensive qualities, solid past performance, and appetite for acquisition, I like the look of Cranswick.
ABF is a good defensive stock option. However, it contains a retail division that is unfortunately haemorrhaging money at the moment. The food production arm of the business is recognised as one the world’s largest producers of sugar and bakers yeast. Furthermore it owns some well-known brands such as Jordans, Twinings, Kingsmill, and Silver Spoon.
A half-year trading statement released at the end of April revealed that the food division – split into sugar, grocery, ingredients and agriculture – continued to trade well through the crisis. Unfortunately, many Primark stores being closed across the country and in other international locations is said to be losing ABF close to £650m per month. It has decided to cancel its interim dividend and will decide on the full-year dividend at the end of fiscal year.
ABF has cash reserves of over £1bn which should see it through the economic downturn. I expect that Primark’s eventual reopening will see a resumption of impressive trading figures for its retail arm.
Overall, I feel ABF is worth buying and holding on to. It has a successful record of profit generation, revenue growth, and increasing its dividend per share. The medium-term outlook may not be favourable due to Primark’s temporary closure, however, its food division is still thriving. I would consider buying and holding onto this defensive stock for a long time.
Jabran Khan has no position in any 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.