The past week has seen the worst start to the year for stocks since the early 1900s. The FTSE 100 hasn’t been immune to this carnage. The UK’s leading index has slumped 6% year-to-date, but there’s one group of stocks that’s avoided most of the turbulence.
Defensive plays such as British American Tobacco (LLSE: BATS), Diageo (LSE: DGE) and National Grid (LSE: NG) are top picks for investors seeking to navigate the stormy waters we’ve seen during the first few trading days of this year.
Indeed, since the end of December, British American, Diageo and National Grid have outperformed the FTSE 100 by 2.8%, 2.5% and 5.2%, respectively. Those are impressive performances considering the carnage that’s been taking place in equity markets around the world. And it’s likely that these three top defensive picks will continue to outperform the market as the global economic outlook becomes more uncertain.
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You see, British American, Diageo, and National Grid have always offered a haven for investors due to their defensive nature, and it’s unlikely that this will change anytime soon.
Get defensive
British American, Diageo and National Grid all exhibit two of the most desirable qualities of any investment. First off, their product or service is likely to experience steady demand regardless of the economic situation. Secondly, these three companies all have a record of impressive investor returns, including, but not limited to, an excellent dividend history, wide profit margins and sustainable sales growth.
For example, since 2010 Diageo has been able to grow revenue at a compound annual rate of 2%. Over the same period, the company’s profit margins have steadily improved, and net profit increased at a CAGR of 7.9%. With earnings growing steadily every year, Diageo’s shareholder equity (the value of a company which is the property of its ordinary shareholders) has increased at a rate of 14.1% per annum since 2010. In other words, Diageo has been able to consistently improve shareholder value every year since 2010, despite economic headwinds. Similarly, National Grid has grown shareholder equity at a CAGR of 13.5% since 2010.
British American hasn’t been able to clock up the same kind of growth, but the company has returned around 70% of net profit per annum to shareholders since 2010. So, it’s clear that the company’s management is working for investors.
Outperforming
Steady growth in shareholder equity and net profit usually flows through to investors via higher share prices and that’s exactly what has happened with this trio. Over the past decade, these three defensive stalwarts have outperformed the FTSE 100 by a staggering 185%, 113%, and 65%, respectively, excluding dividends.
Including dividends, British American, Diageo and National Grid have produced a total return for investors of 14% per annum, 8.9% and 7.3%, respectively, over the past 10 years. Over the same period, the FTSE 100 has produced a return of only 4.1% each year.
