While the FTSE 100 has risen by over 2% this year, there are major risks facing its future. Investor sentiment could be hurt by the start of Brexit negotiations, or by the slow progress of Donald Trump’s spending plans. As such, it would be unsurprising for the index to come under a degree of pressure as the year progresses.
In such a situation, defensive stocks could help to protect a portfolio from index declines. With that in mind, here are two shares which could deliver relatively strong performance this year.
Diversified business
Reporting on Friday was Smiths Group (LSE: SMIN). It is an exceptionally well-diversified business, with operations in a range of industries including defence, healthcare and technology. As a result, its performance during a difficult period for the economy may be relatively strong, as one division may be able to offset the disappointing performance of another.
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The company’s half-year results showed it is making encouraging progress. Revenue increased by 18%, while operating profit was 27% higher. It benefitted from a rise in the operating margin of 150 basis points. This should allow greater investment in the company’s future growth opportunities, while also placing it in a stronger position to weather any future economic storm.
Growing profitability led to a rise in dividends of 2.3%. Although this means that Smiths Group currently has a dividend yield of only 2.7%, there appears to be further dividend growth potential. The company’s dividends are covered more than twice by profit. With earnings growth of 7% forecast for this year and 9% pencilled-in for next year, an inflation-beating dividend growth opportunity appears to exist. Alongside its defensive and diversified business model, this could make Smiths Group a strong performer in 2017.
Defensive business
Of course, few stocks can compete with water companies when it comes to defensive characteristics. Demand for water is unlikely to change dramatically even during recessions, which could make United Utilities (LSE: UU) a logical place to invest for 2017.
The company’s beta of 0.5 indicates that its share price should change by around half as much as the FTSE 100 in the short run. Should investor sentiment decline, United Utilities could deliver high outperformance of the wider index. It also means a less volatile shareholder experience, which may be attractive to income investors who are concerned about inflation and other risks facing the UK and global economies.
With a dividend yield of 3.9%, United Utilities continues to offer an above-average yield. Since dividends are covered 1.2 times by profit, they appear to be sustainable and should allow for sufficient investment in its asset base. Furthermore, dividends per share are forecast to rise by 2.8% per annum over the next two years, which should keep their growth rate ahead of inflation. And with the ever-present potential for a takeover due to its reliable income stream, United Utilities could be a star performer in 2017 and beyond.
