In a UK recession, I’d buy these 2 FTSE 100 defensive stocks with attractive yields

Matthew Dumigan
Arrow descending on a graph portraying stock market crash

As the stock market crash continues, countries around the world look set to sink into historic recessions. Both the supply and demand sides of the economy have been hit as a result of the shutdown of vast amounts of economic activity.

There have been reports that a recession is looming in the UK. This comes as a result of Covid-19 causing Britain’s fastest economic contraction on record.

Evidently, this isn’t good news for investors. Output has slumped, unemployment has risen, and overall economic activity may take months to recover. That’s a recipe for disaster for many share prices.

Defensive stocks

In a recession, many investors focus on buying defensive stocks. This strategy can help limit poor returns and provide a stable dividend income, even when other stocks are taking a hit.

Defensive stocks provide consistent dividends and relatively stable earnings, irrespective of the conditions in the stock market. That’s what makes them so appealing, especially at a time when most other companies are struggling.

Some examples of defensive stocks include consumer staples such as supermarkets, household goods providers and beverage producers. There’s plenty to choose from in the stock market.

For me, healthcare stocks are great defensive buys. That’s because, no matter the state of the economy, there’s a constant demand for their products.

With that in mind, AstraZeneca (LSE: AZN) and GlaxoSmithKline (LSE: GSK) are my top defensive picks. Both are multinational, market-leading pharmaceutical companies that are part of the FTSE 100 index. 

What’s more, both companies are on the front line in the battle against Covid-19. The two pharmaceutical giants are set to launch a Covid-19 testing lab, where drug makers will work to improve testing capabilities to aid government efforts.

Stable dividends

Across the index, many companies have slashed dividends. Here, the objective is to retain vital amounts of cash that could be needed to keep them afloat.

This means it’s a difficult time to be an income investor, as dividend payments dry up left, right and centre. However, Astra and GSK are companies that will provide consistent dividends no matter the economic climate.

GSK offers an attractive yield of 5.27%, while Astra’s yield sits at 3.15%. Both companies have their dividends covered 1.55 and 1.8 times by earnings respectively.

Additionally, both companies are in a strong financial position. At AstraZeneca, rapid sales growth from newly developed drugs caused full-year revenues and operating profit to rise by 13% in 2019. Meanwhile at GSK, fourth quarter revenues rose 11%, despite underlying profits falling by the same figure.

Solid long-term investments

In my opinion, the two companies shouldn’t be seen purely as defensive stocks to help you through a market crash or recession. I think both have great long-term growth prospects and are set to benefit from multiple socioeconomic factors in future.

For example, an ageing population means that demand for healthcare and pharmaceutical products will increase. That suggests Astra and GSK’s long-term growth prospects are bright.

Moreover, after the recent hit to share prices, GSK is trading at a price-to-earnings ratio of around 12. That’s below the company’s long-run average of approximately 15.

For me, shares in GSK and Astra offer a solid exposure to defensive stocks. What’s more, I think the two companies’ bright growth prospects only serve to sweeten the deal.

The post In a UK recession, I’d buy these 2 FTSE 100 defensive stocks with attractive yields appeared first on The Motley Fool UK.

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Matthew Dumigan has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020