Should you buy defensive stocks Centrica plc, British American Tobacco plc and The Sage Group plc ahead of the EU referendum?

Defensive stocks Centrica plc (LON:CNA), British American Tobacco plc (LON:BATS) and The Sage Group plc (LON:SGE) could perform well in the face of the EU referendum’s effects.

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The EU referendum is going to have an unprecedented effect on the markets. It’s likely we’ll see increased volatility leading up to and after the vote on 23 June. These defensive shares should offer some stability to a portfolio and investors should be considering moving some capital into defensive investments. 

Utility powerhouse

Centrica (LSE: CNA) is a classic defensive stock and should hold up well over the next few weeks. I also think the stock offers considerable scope for growth in the next few years. The company pays a chunky dividend yield of 5.5% and trades on a forward 2016 price-to-earnings ratio (P/E) of 12. This is below its peers and illustrates that the company is somewhat undervalued. It surprisingly raised £700m in May to make two acquisitions and pay off some debt. This was a smart move by the company and shares are now trading above the placing price. Centrica is also set to divest a number of upstream oil and gas assets in the next few years, which should lead to lower costs. These divestments could also bring cash into the business, which may lead to further dividend increases. 

Tobacco king

In the face of lower tobacco volumes and fewer smokers British American Tobacco (LSE: BATS) is still growing revenues and profits. Tobacco companies have always made solid defensive stocks and have outperformed the wider market since January. British American Tobacco is the biggest tobacco company in London and it trades on the highest P/E of 18.3. This looks expensive but the company has significant growth potential. E-cigarettes are becoming ever more popular and should drive revenues in the future. British American Tobacco also owns some hugely important and recognisable global cigarette brands. The company is focusing on these brands and this is boosting volumes, revenues and profits. 

Software giant

Sage (LSE: SGE) shares are another classic defensive play and should be much less volatile than indices in the next few weeks. The software provider has also performed well over the last six months but I’m not sure this will continue in the long term. Sage released impressive first half results in May which saw revenue up 6.2% and operating profit up 1.9%. The dividend yield has slipped to just 2% and the company is trading on a forward P/E ratio of 20 for 2017.  It has good prospects and earnings are set to grow in the future but I think the shares are well valued. Even if the company doesn’t grow rapidly it’s still defensive and should hold up during increased times of volatility. 

These three shares may not be the best long-term investments but can be used as important ways to shelter cash during volatile times. After the EU referendum, shares should fall less on a leave vote but still rally on a remain vote. This can be a great tool for investors to use in times of uncertainty. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Dingwall has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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