It’s fair to say that many investors are currently worried about the outlook for financial markets. Global growth is slowing, disturbing noises are coming from China and the US presidential election is causing concern across Wall Street.
On top of these macroeconomic issues, as the bull market in stocks enters its seventh year, investors are becoming worried about the market’s valuation and how much longer rising stock prices can be sustained with sluggish economic growth.
However, for the long-term Foolish investor, while these concerns are valid, they shouldn’t impact investing decisions. Buying high-quality defensive companies that have a history of outperforming in tough times is always a sound strategy to follow, and it means you don’t have to worry about trying to guess what the market will do next.
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Unilever (LSE: ULVR), Reckitt Benckiser (LSE: RB) and London Stock Exchange (LSE: LSE) are three such companies.
Safe haven assets
Reckitt and Unilever are two of the world’s largest fast-moving consumer goods companies. They’ve shown over the past decade that they can grow earnings and sales no matter what the economic environment.
London Stock Exchange is a bit different. Currently in the process of merging with German counterpart Deutsche Boerse, the enlarged group will be one of the largest financial services companies in the world. This will give the UK-German entity a defensive nature. There’s a Wall Street saying, “why do brokers always cheer at the end of the trading day?” The explanation is simple; brokers always make money via commissions no matter what the market environment. The enlarged LSE- Deutsche Boerse will be in a prime position to profit even when times are hard as traders make use of its expanded product offering.
Unfortunately, Unilever, Reckitt Benckiser and LSE may be the perfect stocks to own in an uncertain environment, but they don’t come cheap.
Worth paying a premium for
At the time of writing shares in Unilever are trading at a forward P/E of 23.3, shares in Reckitt are trading at a forward P/E of 25.3 and shares in the LSE are trading at a forward P/E of 23.9. Some investors might be put off by these high valuation multiples, but these companies trade at premium prices for a reason. The shares have bond-like qualities, which broadly means they offer a steady income with little downside risk. However, unlike most bonds, the shares of Unilever, Reckitt Benckiser and LSE offer the potential for earnings growth, dividend growth and further share price appreciation over the long-term.
Considering the current yield on the UK 10-year gilt is 0.56%, it’s worth paying a premium for any bond-like investments that offer a level of income above this disappointing gilt yield.
LSE’s shares support a dividend yield of 1.3%. Unilever’s shares support a yield of 2.8% and the payout is expected to grow by 7% next year. And Reckitt’s shares yield 2% with City analysts expecting payout growth of 10.5% for 2017.
