Interactive Investor

9 defensive FTSE stocks trading at new highs 

23rd June 2021 14:38

Ben Hobson from Stockopedia

The boom in demand for reliable shares is a reminder why portfolio diversification between sectors can work so well. Stockopedia’s Ben Hobson picks out some of the best.

News this week that grocery giant Morrisons (LSE:MRW) is in the sights of a private equity buyer was a reminder of just how appealing the UK supermarket sector really is. 

For retailers themselves, of course, competition is fierce. If anything, it’s getting fiercer, and the fight for market share and pressure on margins is intense. But for investors, the defensive dependability - and profitability - of this sector makes it an all-weather friend. No wonder buyers are circling.

In the years since the financial crisis of 2008/09, UK shares have been on an upward trend. Occasional setbacks (like Brexit and Covid) have done little permanent damage to confidence. Instead, low interest rates, buoyant economic conditions and growing corporate earnings have kept equity investors interested.

In this environment, cyclical stocks have been some of the big winners. Bullish investing strategies that focus on growth and momentum have thrived. Small and mid-cap stocks with more volatile share prices have delivered some stunning returns. The hottest cyclical sectors like consumer cyclicals, basic materials (mining) and financials have been in strong demand.

So the £5.5 billion bid for Morrisons from buyout group Clayton, Dubilier & Rice, is worth taking note of. Defensive stocks have - in a very broad sense - been in the shadow of cyclicals in recent years. But the long-term appeal of having exposure to defensive sectors is undeniable.

Diversifying into defensives

Compared to cyclicals, defensive shares are generally less reliant on the economy because they sell goods that we all buy in good times and bad. Classically, they include pharmaceuticals, tobacco and utility companies. It’s no coincidence that in the past these have been some of the most consistent dividend payers in the UK market. They are, by their nature, consistently reliable. 

Indeed, over the past 18 months of Covid disruption, supermarkets have been in solid demand, not least because they were one of the few places that anyone could really go. Yet their defensive nature can mean that their valuations don’t stretch in the same way as more popular cyclical growth shares. And it’s perhaps here that Clayton, Dubilier & Rice have sensed an opportunity.

For Morrisons, the bid triggered a near-30% rise in its share price, taking it to a high not seen for two-and-a-half years. But takeover bids aside, Morrisons isn’t the only defensive share hitting new highs recently. A scan of the three main defensive sectors - consumer defensives, healthcare and utilities - across the FTSE 350 finds that a number of stocks in this area of the market are currently trading close to new highs. Here are some ideas:

   Name      Mkt Cap £m       Price vs. 52w High %       P/E Ratio       Stock Rank       Sector   
Diageo (LSE:DGE)   
Consumer Defensives   
Coca-Cola HBC AG (LSE:CCH)   
Consumer Defensives   
Dechra Pharmaceuticals (LSE:DPH)   
Morrison (Wm) Supermarkets (LSE:MRW)   
Consumer Defensives   
United Utilities (LSE:UU.)   
J Sainsbury (LSE:SBRY)   
Consumer Defensives   
Severn Trent (LSE:SVT)   
Britvic (LSE:BVIC)   
Consumer Defensives   
Pennon (LSE:PNN)   

Source: Stockopedia  Past performance is not a guide to future performance.

These defensives have all seen very solid price momentum in 2021. Utilities like Severn Trent and United Utilities have lower StockRanks than the others (the StockRanks are a measure of their overall quality, value and momentum), but generally the ranks are reasonable, with Britvic ranking highest. Diageo leads the list in terms of its proximity to a one-year price high.

Defensives in demand

In the immediate aftermath of the market crash in early 2020, all eyes were on defensive stocks. Interest surged and their prices rose accordingly. And, while the market recovered well and cyclical shares bounced back, it was a reminder why portfolio diversification between sectors can work so well. 

Defensive exposure in a portfolio can offer comfort in spells of uncertainty. And while these kinds of shares don’t always offer big upside in bull markets, they can find themselves in strong demand as investors gravitate to their more predictable nature. That seems to be something we’re seeing right now.

interactive investor readers can get a free 14-day trial of Stockopedia here.

These investment articles are simply for generating ideas. If you are thinking of investing they should only ever be a starting point for your own in-depth research.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.