I think an opportunity has opened up for investors in the shares of companies we like to describe as having ‘defensive’ businesses. The word ‘defensive’ doesn’t make them boring, far from it. These firms are among the most exciting and dynamic long-term holds you can buy on the London stock market. But because of their generally stable and predictable cash inflows, they also tend to be among the safest stocks to hold, hence the label ‘defensive.’
Improving valuations
Such attractions do not go unnoticed and over the past few years, many have piled into defensive stocks, while low interest rates rendered returns from bonds and bank accounts derisory. The thinking went something like this: “Bonds and bank accounts are rubbish, but look at those juicy dividends available from safe-looking defensive firms over there.” Strong buying pushed valuations of the defensives higher – perhaps too high.
Now, many investors seem to be rotating to cheaper-looking cyclical stocks. Defensive firms’ share prices are lower and valuations are starting to look attractive once more. I’ve been waiting for the downtrends in these stocks to falter for some time and think we are seeing evidence of basing now. So perhaps this is a good time to revisit the defensives with a long-term buy-and-hold strategy in mind. My top two FTSE 100 defensive starter stocks to buy and hold forever are both fast-moving consumer goods companies, Unilever (LSE: ULVR) and Reckitt Benckiser Group (LSE: RB).
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Decent trading
In April with the first-quarter trading statement, Unilever chief executive Paul Polman said that trading for the year got off to a good start with “good volume-driven performance across all three divisions.” He put this down to the firm’s ‘Connected 4 Growth’ programme, which aims to “enhance” the company’s “long-term compounding growth model.”
Unilever expects underlying sales to grow between 3% and 5% for the full year and an improvement in underlying operating margin and cash flow, which suggests the company’s attention to cost-cutting and efficiency improvements is keeping growth on the agenda.
And in more good news for investors, the firm plans to buy back around €6bn of its own shares and also declared an 8% hike in the dividend “reflecting confidence in our outlook.” Growth looks as if it’s on track with Unilever and I see recent share-price weakness as an opportunity to buy the shares at a better valuation.
Reckitt Benckiser also recently reported a solid start to the year. Last year’s acquisition of Mead Johnson Nutrition Company prompted the firm to restructure into two divisions – RB Health and RB Hygiene Home. There’s some weakness in a few of the firm’s health brands, such as Scholl, but overall, the directors seem confident that organic growth will deliver revenues in line with expectations for the full year.
City analysts following the firm expect revenue to increase around 8% during 2018, which should deliver an uplift in earnings of around 3%. In 2019, they think earnings will rise 8%. Those earnings growth rates are a little lower than the double-digit advances we’ve seen in recent years. But the company has said: “We are addressing our performance in Scholl through acceleration of our pipeline, penetration improvement programmes and streamlining our range.” I think the stock is well worth your research time.
