Hunker Down With These 3 Defensive Shares

Published in Investing on 29 August 2012

It's time to be cautious again.

It's the battle of the QE bulls versus the eurozone bears. Markets have enjoyed a good run in the summer, with the FTSE 100 (UKX) up 8% since 1 June. Trading has been thin over the holiday period, but sentiment has been buoyed by expectations of more government stimulus.

Bulls are looking for action at Friday's meeting of central bankers at Jackson Hole, Wyoming. They are also hoping for policy stimulus to come out of the ECB Governors' meeting on 6 September.

Perma bears

Perma bears such as myself see a head of steam building in Europe. Those tax-dodging, early retiring, welfare-cushioned, government-paid southern Europeans are about to savage our savings and pensions once again. When debt market traders get back to their desks next month, they will see a deteriorating environment in Europe.

The Greek Prime Minister is asking for more money and looser terms from an impatient German electorate. The peripheral northern European economies -- Finland, the Netherlands and Austria -- are becoming more vocally intransigent. The Spanish regions are queuing up to beg money from central government.

Italian politicians can't agree how to elect a new government to replace Mario Monti's unelected administration. If Italians prove as reluctant to vote for austerity as Greeks, that would surely kill the euro.

Hunker down

Federal Reserve chairman Ben Benanke and Bank of England governor Sir Mervyn King have both said that repeated bouts of easing have diminishing returns. To me, it looks as if markets are likely to head downwards. So it's time to take some cash profits from the summer's rally and hunker down with a defensive portfolio.

I'm looking for shares in defensive sectors with decent yields and relatively low eurozone exposure. I'd also like a decent slug of emerging market business as that still offers growth potential. I'm going to pick three shares to illustrate my thought process.

Outstanding

Pharmaceuticals and tobacco were the two outstanding sectors in the financial crash of 2008-9. They fell 15% and 17% respectively between 31 October 2007 and 3 March 2009, while the FTSE 100 halved.

Tobacco investors face a binary choice: British American Tobacco (LSE: BATS) or Imperial Tobacco (LSE: IMT). Despite the anti-smoking lobby, which scored a notable victory in Australia with the introduction of plain packaging, the sector remains resilient. BATS is the more expensive stock, but rewards that with a bigger emerging markets business and lower dependence on Western Europe. With a higher payout ratio, it yields around the same as Imperial at 3.8%.

In the pharma sector, realistically the choice is also binary, between GlaxoSmithKline (LSE: GSK) and AstraZeneca (LSE: AZN).

Risk

But AstraZeneca is facing the challenge of replenishing half its current income stream by 2016 when current patents expire, and to me is a relatively high-risk share. The appointment of Pascal Soriot from Roche suggests that it will try to do that through R&D rather than M&A, and raises the danger that interim CEO Simon Lowth will not hang around as FD. To my mind, that increases the strategic risk.

I like GSK for its 4.8% yield and superlative dividend track record. Twice the size of Astra, brute force of R&D expenditure had reaped better rewards in replenishing its drugs pipeline, while diversification into consumer goods adds to its defensiveness, and emerging market penetration boosts growth prospects.

Credentials

Vodafone (LSE: VOD) didn't distinguish itself during the financial crash with its shares falling nearly 40%, barely better than the FTSE. Nevertheless, it now has great credentials as a defensive stock, and the 5.1% yield is superlative. Dividends from its 45% interest in Verizon Wireless (NYSE: VZ.US) add yet more to a prodigious cash flow underpinned by its massive scale.

It's no surprise that these shares are all held by Invesco Perpetual's Neil Woodford, the UK's leading dividend stock picker. But to produce great returns like him -- he achieved a near 350% return over 15 years to the end of 2011 -- it's just as important to know what stocks he avoided. You can learn more about that in a free Motley Fool report: "8 Shares Held By Britain's Super Investor". You can download it to your inbox here.

Are you looking to profit as a long-term investor? "10 Steps To Making A Million In The Market" is the latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- while it's still free and available.

More investment opportunities

> Tony owns shares in AstraZeneca, GSK and Imperial but no other shares mentioned in this article.

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

ANuvver 30 Aug 2012 , 1:31pm

No arguments about a defensive stance, nor your choices.

re Vodafone:
It should be understood that Verizon Wireless doesn't seem to willingly part with dividends. I think it's likely, but it isn't a given.

merchantprince00 03 Sep 2012 , 9:49am

Interestingly I have 3 of the 5 set up as an experimental portfolio as they form part of Neil Woodford's top 10 holdings and top 3 sectors in his High Income fund.

http://adventuresinequities.blogspot.co.uk/p/following-woodford.html

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.