Since early 2009 it has been recovery stocks, and especially cyclical plays, that have been in the limelight. That has meant defensive shares, those solid stock-market stalwarts that deliver reliable profits and dividend payments come thick or thin, have lost their lustre for investors.
That's partly because the recent recession wasn't kind to defensives. Many sectors that traditionally are thought of as defensive disappointed following the credit crunch, such as transport companies which were hit by declining passenger numbers.
But recent 'black swan' events - be they revolutions or natural disasters - have highlighted the attractions of dull-but-worthy shares. So we’ve screened over 1,500 companies to find those showing signs of true consistency in the face of adversity. As usual, we consider the stocks listed below as a starting point in the hunt for quality defensive stocks.
Our search starts with valuation. Even if a company's end markets seem defensive, a high rating represents an extra layer of risk. It suggests the market's expectations are high which means any disappointment is likely to be harshly punished. So our screen is looking for stocks that represent value. We’ve take a historic dividend yield of 3.5 per cent or more as our measure of "value". In addition, stocks have to satisfy all of the following nine criteria.
■ Positive underlying EPS for each of the last ten years.
■ Uninterrupted dividend payments for ten years.
■ Underlying EPS higher than five years ago; not an easy test given the events of the last five years.
■ Dividend per share higher than five-years ago.
■ A decent return on equity of 12.5 per cent or more. What we're looking for here is a measure for the underlying quality of the company, which is important in determining a good defensive play.
■ A current ratio (net assets compared with net liabilities) greater than one. Defensive companies often have considerable debt as they have the solid reliable earnings stream to support such leverage. However, we still want to see that companies have enough readily available assets to cover upcoming liabilities.
■ Market value of more than £100m; larger companies are generally less risky than small ones.
■ A maximum payout ratio (dividends as a proportion of post-tax earnings) of two thirds. We don’t want to pick companies that are likely to run into problems sustaining their dividend.
■ A beta of less than 0.75 – the beta measures the relationship between movements in the wider market and a share price. If a company is less sensitive to the ebbs and flows of the economy, then its shares should be less sensitive to the ebbs and flows of the market.
Cheap and defensive
| Company | TIDM | Market cap | Price | Beta | Yield |
|---|---|---|---|---|---|
| AstraZeneca | LSE:AZN | £39,424m | 2,849p | 0.30 | 5.7% |
| Centrica | LSE:CNA | £16,638m | 323p | 0.48 | 4.4% |
| Northumbrian Water Group | LSE:NWG | £1,688m | 326p | 0.57 | 4.0% |
| Hill & Smith Holdings | LSE:HILS | £246m | 319p | 0.39 | 4.0% |
| Albemarle & Bond | AIM:ABM | £165m | 302p | 0.30 | 3.9% |
| Mitie Group | LSE:MTO | £704m | 200p | 0.39 | 3.9% |
| Next | LSE:NXT | £3,597m | 2,043p | 0.42 | 3.8% |
| Pennon Group | LSE:PNN | £2,233m | 626p | 0.44 | 3.6% |
| GlaxoSmithKline | LSE:GSK | £58,809m | 1,160p | 0.34 | 5.6% |
| Telecom Plus | LSE:TEP | £317m | 459p | 0.39 | 4.8% |
| British American Tobacco | LSE:BATS | £47,859m | 2,401p | 0.39 | 4.7% |
| RM | LSE:RM. | £135m | 152p | 0.14 | 4.3% |
| Clarkson | LSE:CKN | £233m | 1,252p | 0.17 | 3.8% |
source: CapitalIQ
