In previous articles we have looked at value investing and we’ve looked at income investing. We’ve also looked at GARP investing and growth investing. Then we turned our attention to cyclical shares. Today we are poking around defensive shares.
What Are Defensive Shares?
Before you read any further, please note that defensive shares aren’t the most exciting shares to own when times are good. But in their defence (no pun intended), defensive shares don’t tend to be hit nearly as brutally when times are bad. Some investors might go so far to say they are almost recession-proof.
That’s because defensive companies’ products and services tend to remain fairly stable in any economic climate. Additionally, their markets are not exposed to too much competition from new entrants. And even if new entrants do appear on the scene, it is unlikely they will be too disruptive given the maturity of the sector.
The key word here is “mature”. By and large, defensive companies tend to not only be mature but also operate in mature sectors. Consequently, they are unlikely to require lots of cash to grow. The upshot is that defensive companies tend to pay out a significant chunk of their profits as dividends to shareholders.
Roll out the Barrel
Alcohol is a typically defensive sector. Regardless of whether the economy is doing well or badly, alcohol sales tend to hold up quite well. Thai Beverage Company (SGX: Y92), which is a constituent of the Straits Times Index is a good example of this. Over the last seven years, turnover at the brewer has grown by about 7% a year. And even during the 2007 banking collapse, sales of the “amber nectar” have been fairly resilient.
Food, glorious food
Whether the economy is good or whether it is bad, we still need to eat, which is why supermarkets are seen as defensive. Consider Dairy Farm International Holdings (SGX: D01), which is 78% owned by Jardine Strategic Holdings (SGX: J37). The supermarket, which operates under the banners of Cold Storage, Jason’s and Giant in Singapore, actually saw its revenues increase during the banking collapse of 2007. Elsewhere in the Singapore food-retailing sector is Sheng Siong (SGX: OV8), which is Singapore’s third-largest supermarket chain, and instant coffee maker Super Group (SGX: S10).
Other examples of defensive shares could include public-transport operators ComfortDelGro and SMRT, and healthcare companies such as Raffles Medical Group. After all, we still need to get to and from work regardless of what the economy is doing, and people will always prioritise a visit to their GP whatever is happening to the GDP.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.