Is Investment in Defensive Stocks Good For Long Run?

  • Nov 13, 2019 AEDT
  • Team Kalkine
Is Investment in Defensive Stocks Good For Long Run?

Defensive Stocks

Investors avoid volatility when it comes to the stock returns, more so when we take retail investors into consideration. Equity returns by their very intrinsic nature provide volatile returns, does that mean there is no solution to avoid excessive volatility? Luckily for investors, a category of stocks called the “Defensive stocks” provide a good hiding place to navigate volatility.

Defensive stocks are less prone to cyclical economic risks; the goods and services delivered by defensive stocks are usually tied to the basic needs of human, allowing the revenues to be somewhat resilient across business cycles.

Defensive stocks usually offer relatively better dividend yield potential; however, markets might suppress those dividend yields amid a wider economic slowdown by crowding out the defensives.

Defensive stocks include stocks from consumer staples, telecommunications, utility and health care sectors. Investors should carefully look at the defensive proposition of the stocks, as the overall sector might include stocks that are not considered defensive.

Typically, defensive stocks also include large blue-chip companies with a stable business and a diversified revenue stream.

For example-telecommunication companies are part of the communication services sector, which also include cyclical companies from the media & entertainment industry.

[ New to the term "Defensive Stocks" - Learn What Are Defensive Stocks]

Defensives in Long Run

Any investor with less risk appetite and a defensive stance on his/her investments should consider defensive stocks, as they provide some protection against the downside risks in other stocks. Moreover, a diversified portfolio usually consists of defensive names as well as other investments.

Resilient Income

Defensive stocks have stable revenues, earnings and ultimately stable dividends with potential for growth in dividends. As interest rates are lowered, it allows defensives to cut on the interest payments on their floating rate debt, possibly further providing defensives with a room to increase dividends.

Stability

Defensive stocks usually command less volatility or low beta, allowing investors to have a stable return over a period of time. It provides an excellent proposition for risk-averse investors to preserve and grow capital over time with stable returns.

Hedge

Defensive stocks could act as a hedge against the volatility of other stocks in the portfolio due to their resilient and stable business models, stable profit and so its share price, as low volatility of defensives would allow lowering the average volatility of the portfolio.

Valuation

Usually Defensive stocks trade at a higher multiple such as PE, due to the aforementioned points. They are sought after by not only the retail investors but also institutional investors to balance their returns. These stocks also form part of many ETFs and thus their valuation premiums are also on the higher side of the band.

Conclusion

At the outset, defensive stocks provide the investors with an opportunity to allocate capital in stocks that are relatively less vulnerable to cyclical economic risks. At the same time, it allows investors to have stable returns and resilient income opportunities.

Thus, defensives stocks appear more significant for the long term and income-seeking investors at a time when earnings in other sectors might witness dents due to a broader economic slowdown.

Australian Defensive Stocks

In Australia, the investors have a wide variety of businesses to allocate investments, including defensive stocks. Some of the defensive stocks in Australia are:

Some Australian defensive stocks from income perspective have been listed in the below table:

australian defence stocks

Dividend Yield (Source: ASX, 13 November 2019)

Woolworths Group (ASX: WOW)

The group operates multiple divisions, including Australian Food, Endeavour Drinks, New Zealand Food, Big W, and Hotels. Some of its brands include Woolworths Supermarkets & Metros, Dan Murphy’s, BWS, Summergate, Cellarmasters and Langtons.

Presently, the group is undertaking a restructuring, and merging Endeavour Drinks and ALH Group, to create a separate entity. This would result in a demerger of Endeavour Drinks from the group to form Endeavour Group.

In the year ended 30 June 2019, the group had declared total dividends of 102 cents per share compared to 103 cents per share in the previous year. In the previous year, the group had paid a special dividend of 10 cents per share. In May 2019, Woolworths Group returned $1.7 billion in capital to shareholders through an off?market share buy?back.

On 13 November 2019 (AEST 01:55 PM), WOW was trading at $38.010, down 0.105% from the previous close.

AGL Energy Limited (ASX: AGL)

The company operations include energy business and investments, including electricity generation, gas storage and the sale of electricity and gas to residential, business and wholesale customers.

In the year ended 30 June 2019, the company declared total dividends of 119 cents per shares, up 2 cents per share over the previous period, having increased over 50 cents since FY 2016. In addition, the company has a dividend policy to target a pay-out ratio of 75% of underlying profit after tax.

AGL’s FY2020 guidance includes an underlying profit after tax in the range of $780 million to $860 million

On 13 November 2019 (AEST 02:00 PM), AGL was trading at $19.900, down 0.599% from the previous close.

Tabcorp Group Limited (ASX: TAH)

The group operates some of the well-known Australian gaming brands, including The Lott, NSW Lotteries, Golden Casket, Tatts, TAB, Sky Racing, Keno and MAX.

In the year ended 30 June 2019, the group delivered total dividends per share of 22 cents per share. FY 2019 was the first full-year in which Tabcorp and Tatts operated as a combined business.

TAH’s integration plan is on track to complete by FY21, which was started in December 2017. The initiatives taken by the company have a target to deliver $90 million in earnings from cost synergies & business improvements in FY 20.

On 13 November 2019 (AEST 02:03 PM), TAH was trading at $4.790, down 0.416% from the previous close.

Rural Funds Group (ASX: RFF)

Rural Funds Group is an ASX-listed agricultural REIT, primarily deriving revenues from leasing its agricultural assets.

In the year ended 30 June 2019, the fund declared 10.43 cents per share in distributions for the period, representing a pay-out of 78% from adjusted funds from operations (AFFO) which was 13.3 cents per unit for the period.

More importantly, the group delivered on its objective of maintaining a distribution growth of 4%, among others.

On 13 November 2019 (AEST 02:06 PM), RFF was trading at $1.730, down 1.143% from the previous close.


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