3 Defensive Stocks That Could Prove To Be Winners

With the S&P 500 still close to all-time highs, now could be an opportune moment to consider more defensive alternatives. Here are 3 tobacco plays that could fit the bill.

Apr 16, 2014 at 1:38PM

There are certain investment-related quotes that appear when markets are at extreme levels. For instance, the classic "buy when blood is running in the streets" (Rockefeller) is a useful reminder that a vast proportion of profit is made when shares are bought (at a very low price) rather than when they are sold. Similarly, Warren Buffett's quote "you only find out who's swimming naked when the tide goes out" is a useful reminder that taking high levels of risk at the wrong time can be very costly.

So, with the S&P 500 still within touching distance of its all-time highs and the Federal Reserve beginning the tapering of its monthly asset repurchase program, could now be a good time take some risk off the table and instead reallocate capital to lower beta, higher yielding, defensive plays?

Tobacco Stocks Could Add Value
Tobacco stocks benefit from fairly stable demand for their products. Whether the US and global economy is in a boom or a recession, people still smoke, with a switch to a lower/higher price point brand (depending on the state of the economy) more likely than giving up the habit as a result of less disposable income. Due to this, tobacco companies tend to offer lower betas and a more secure dividend payment than many of their index peers. Both of these attributes could prove vital during a market correction or bear market.

Here are three tobacco stocks that could fit the bill in terms of betas, yields and defensive attributes.

Altria
Put simply, Altria (NYSE:MO) provides superb defensive qualities. For instance, its beta is currently just 0.4, which means that a 10% decline in the index level should equate to a decrease of just 4% in Altria's stock, with the same being true of gains, should the market continue to make higher highs. This low beta means that Altria could reduce portfolio volatility going forward.

Meanwhile, Altria's yield of 4.9% is vastly higher than that of the index (the S&P 500's yield is just 2%), and this could prove useful in times of market corrections when 'cash is king.' In other words, it could provide a stable income with which to invest when index levels are low. In turn, this could provide higher profits in the long run, as shares in quality companies can be purchased at distressed prices (when blood is running in the streets).

Philip Morris
The 4.4% yield offered by Philip Morris (NYSE:PM) is well-covered at 1.5x, which seems to be very sensible and shows that the company is not over-extending itself when it comes to payments to shareholders. This makes the income from the stock even more sustainable and highlights its potential as a sound defensive play.

The price for a great yield and defensive business model, though, is not excessive. With the S&P 500 trading at a forward price to earnings (P/E) ratio of 15.4, Philip Morris appears to offer good value for money at current levels, since its forward P/E is 15. Although higher than Altria's forward P/E of 13.9, it is still relatively good value when compared to the index and shows that there are still potential buying opportunities in this market.

Reynolds
When it comes to low betas, Reynolds (NYSE:RAI) is the clear leader of the three stocks. Its beta is just 0.3, which means that it could offer a lower volatility of returns than many of its index peers and could outperform the wider index during a market correction. Furthermore, Reynolds' yield of 4.7% compares well with its two tobacco peers and provides investors with an income at a time when the interest rates on savings accounts are extremely low.

As for its P/E, although it's higher than Altria's, Reynolds' forward P/E of 14.9 is less than that of Philip Morris. It is also less than the S&P 500's and shows that all three stocks offer good relative value when compared to the index.

In addition, Reynolds' payout ratio of 79% is not particularly excessive for a company that has operated in a mature industry for a long time and appears to strike a balance between reinvestment within the company and the provision of an income for shareholders. In fact, the dividends for all three companies appears to be sustainable, which only adds to their attraction as defensive plays.

The Future Is Unknown
Of course, the S&P 500 may make fresh highs and not take back the gains it has made since the Federal Reserve's monthly asset repurchase program commenced. If, on the other hand, it does go through a tough period, Altria, Reynolds and Philip Morris could help you to overcome the lows and instead take advantage of a more attractive price level in the wider index so you're set up well for the eventual highs.

The Motley Fool's completely free report on 3 Dow stocks to buy today
If you're looking for some long-term investing ideas, you're invited to check out The Motley Fool's brand-new special report, "The 3 Dow Stocks Dividend Investors Need." It's absolutely free, so simply click here now and get your copy today.

Robert Stephens has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers