Best Defensive Stocks
When facing current market prices, many investors who are looking to put their money to work have a lot of anxiety. Stocks are at all-time highs, P/E ratios are growing, but on the other end, companies are delivering solid income statements and strong balance sheets. The Dow 30 is closing in on 17,000, and the market has not had a major correction in over a year. However, many economists believe that the U.S. Economy is not as strong as predicted. The latest data shows stronger contractions in the economy than previously forecasted. All eyes will be on Non-Farm Payrolls for the month of June. The report will be released this coming Thursday along with jobless claims. If a market correction ensues any time in the near future, investors would be smart to allocate resources to some defensive equities. Not only do these companies have low volatility, each with a beta of less than one, but they pay healthy dividends, and are part of a sector in which consumer demand is strong.
Let's look at some U.S. utility companies that have delivered strong performances and how they are handling the challenges that lay ahead. A fair-valued utility company is a great defensive stock. Even if market indicators and metrics cause some sort of index correction, people are still paying the utility bill, even at higher prices due to the inelastic service that utility companies provide. So looking at a company that provides these particular household and industrial needs throughout the year lays the foundation for a solid defensive play in the stock market. These companies pay decent dividends, and are matured or continually growing companies that have solid earnings providing for potential equity expansion.
Duke Energy Corporation (NYSE:DUK): Duke Energy has constantly provided strong shareholder value through a solid 4.30% dividend yield, but also has made smart acquisitions over the years to become an energy utility giant with a market cap of $52.12 billion. The company boasts a strong five-year performance, almost doubling in share price from $40 in late 2009 to its current price of $73.70. This diversified utility company provides energy to both the United States and parts of Latin America. The company operates in three segments: Regulated Utilities, International Energy, and Commercial Power. The Regulated Utilities segment provides a vertically integrated operation to Ohio and Kentucky and several other states in the Midwest and Southeast regions of the U.S., operating power plants and selling electricity through the use of coal, oil, natural gas and nuclear fuel to generate electricity. The company has also ventured into solar and wind power acquisition, adding additional megawatt capacity to its United States network. The company's execution on diversifying its power generation portfolio lets shareholders know that the company is focusing on segments where the future is heading. However, Duke still is the largest electric power holding company, with dozens of coal plants, and the move to diversify its portfolio is smart in efforts to combat the Obama administration's carbon emissions plan. Shareholders should be confident in Duke's top management, as it has shown it is willing to change and meet new requirements, despite political beliefs.
Consolidated Edison (NYSE:ED): Consolidated Edison Incorporated is a provider of electric, gas, and steam delivery businesses throughout the United States. Its subsidiary ED of New York provides electric services to around 3.4 million customers and gas to over 1.1 million in Manhattan and other areas in and around New York City. The company also supplies utility services to regions in Pennsylvania and New Jersey. With a 4.40% dividend, this company provides a solid return for shareholders and with a beta of -0.04, the company has virtually no volatility. Over the past two and a half years, the company has traded between $55 and $65 per share, which is a tight range. This was through several small market corrections, such as the eurozone debt crisis. Consolidated Edison shows its strength with delivering strong earnings and maintains a low P/E ratio, which is currently trading at 13.74x trailing twelve-months. One viewpoint at risk to the company's earnings was the expensive cash outlays in order to meet the requirements of new smart-grid infrastructure in the New York metropolitan area. Fortunately, for shareholders, the company has been able to deliver strong earnings by passing these infrastructure costs on to the customers through higher utility bills, increasing first quarter profits by $43 million. Consolidated Edison is shareholder friendly with its continuous payouts through dividends. The company increased its quarterly dividend by 2.4% to 63 cents per share, representing the 40th consecutive increase in the dividend.
CenterPoint Energy Inc. (NYSE:CNP) CenterPoint Energy is a provider of natural gas and electrical transportation and transmission. This company is a large provider of electricity to portions of the United States. It has 3,703 circuit miles of overhead transmission lines and another 21,763 circuit miles of underground distribution lines, with a capacity of providing over 50,000 megavolt amperes through its 234 substations. Further through the company's natural gas distribution assets, it maintains, and sells heating services for air conditioning and other utility uses through over 73,000 linear miles of natural gas distribution lines, or pipes. CenterPoint energy has been around since 1882, and delivers a healthy 3.90% dividend yield, with a low Beta of 0.37. A beta under 1 usually describes low volatility. The company's share price of 25.36 is currently boasting a P/E ratio of 31.31, which is relatively high compared to an industry average of 15.22. A reason to own CenterPoint even with these conditions is due to the fact the U.S. natural gas shale boom has provided large demand for transportation of the gas, and since oil prices are still on the rise due to the unrest in Iraq, people turn to natural gas as a substitute. According to the International Energy Agency, Iraq pulls up 3 million barrels of oil per day and Baghdad alone is sitting on 143 million barrels of oil that are accessible with current technologies. This highlights the major risks to the entire world if that oil production is interrupted significantly. According to RT.com, Exxon Mobil (NYSE:XOM) has already pulled 20% of its operations staff out of the West Qurna 1 field in the south and BP (NYSE:BP) has ordered all "non-essential" staff to leave the country's Rumaila field. Schlumberger (NYSE:SLB) and Baker Hughes (NYSE:BHI) are all reportedly weighing exiting the country as well.
Market Highs? Time to find Defensive Stocks
With current market conditions being a bit pricey, these defensive stocks will see cash inflows as investors seek dividend safe havens to weather out a market correction. Any one of these utility companies would be a valuable addition to one's portfolio. Not only would they provide steady income through the strong dividends in a low interest environment, but the services they provide are in demand 365 days a year. Whether heating in the winter, or cooling in the summer, the demand for utilities providers outpaces U.S. supply, making these investment solid defensive plays in a top-heavy market.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.