The GFC did more than plunge the world economy into chaos. Its aftermath has changed the way many think about markets.
Bond dealer Pimco head, Mohammed El Arian, wrote a book titled “The New Normal” in which he talks about a post-GFC world of lower investment returns, slower economic growth and increased frequency of unanticipated shocks to global financial systems. The sum total of his view is higher risk for investors.
Even those who disagree with this dismal outlook cannot ignore another outcome of the GFC – unnerving swings in volatility indexes. The phrase “Lehman-like event” is bandied about as hyper-cautious professional and retail investors enter and exit market positions with alarming frequency. In truth, tens of thousands of retail investors have fled global equities markets completely, seeking safety in precious metals and fixed income investments.
Ask any retail investor who has been in the game for a few decades and he or she will tell you there was a time when people fled to defensive stocks, instead of cashing out and seeking less risky, less volatile places to park their money.
Traditional defensive stocks provide products or services consumers and businesses need, regardless of the state of the economy. Yet in today’s trading environment, thousands of investors remain unconvinced that any stock in this market can have defensive characteristics.
Managed Funds and Hedge Funds across the globe are hemorrhaging money because investors are pulling their money out. Clearly, many investors no longer trust defensive stocks as safehavens for their hard-earned cash. Are they right?
The following table lists six ASX stocks that provide some evidence to the contrary:
|Company ||Code ||Market Cap ||Sector ||Share Pirce ||52 Week High ||52 Week Lo ||Dividend Yield |
|InvoCare Ltd||IVC ||$922M ||Consumer Services ||$8.38 ||$8.44 ||$6.25 ||3.7% |
|Ramsay Health Care Ltd ||RHC ||$4,171M ||Health Care Equipament & Services ||$20.38 ||$20.50 ||$16.00 ||2.7% |
|Sigma Pharmaceuticals ||SIP ||$827M ||Health Care Equipament & Services ||$0.70 ||$0.76 ||$0.35 ||5.1% |
|Dominos Pizza Entreprises Ltd ||DMP ||$671M ||Consumer Services ||$9.60 ||$9.72 ||$5.25 ||2.5% |
|Telstra Cororation Ltd ||TLS ||44,671M ||Telecommunication Services ||$2.01 ||$2.10 ||$1.24 ||7.5% |
|Teleccom Corpporation of New Zealand Ltd ||TEL ||$3,879M ||Telecommunication Sevices ||$2.01 ||$2.10 ||$1.24 ||7.5% |
Note that these companies qualify as traditional defensive stocks. People cannot exist without telecommunications services and health care. IVC is in the “death care” business, providing funeral services. While people may look to less expensive funerals or perhaps cremation, they have no other options when it comes to dealing with the deceased. Domino’s is a low cost outlet for fast food, which becomes a new destination for consumers looking for less expensive eating alternatives.
Also note that each of these stocks is currently trading very close to their 52 Week Highs, and all pay dividends. Skeptical investors might look at those numbers and remark that one year does not a safe investment make! Nor are dividend payments guaranteed going forward. Both observations are true so let us expand our view to include average annual shareholder return over 1, 3, and 5 Year periods. We will also look at 2 Year growth forecasts for both earnings and dividends. Here is the table:
|Code ||Shareholder Return 1 Year Average ||Shareholder Return 3 Year Average ||Shareholder Return 5 Year Average ||Earnings Growth 2 Year Forecast ||Dividend Growth 2 Year Forecast |
|IVC||26.3% ||21.1% ||12.1% ||33.7% ||9.8% |
|RHC ||13.8% ||26.6% ||16.0% ||19.1% ||11.5% |
|SIP ||98.9% ||4.7% ||-10.8% ||9.3% ||-15.0% |
|DMP ||59.7% ||46.9% ||27.4% ||17.6% ||17.4% |
|TLS ||29.6% ||14.9% ||2.2% ||7.9% ||0.0% |
|TEL ||41.6% ||17.2% ||-2.3% ||16.9% ||17.1% |
Forecasts can be wrong in two ways – they can be too high and they can be too low. If one was forced to eliminate one of the stocks from the above table, SIP with a negative 5 Year return and a negative 2 Year dividend forecast would be the obvious choice. However, intelligent investors know when it comes to share market investing, nothing should be taken as obvious without further research. So let us point out a few of the potential highlights of each of these shares.
Clearly, InvoCare outperformed in a very tough year and continues to appreciate in 2012. The company owns and operates funeral homes, cemeteries and crematoria around Australia, New Zealand and Singapore and has the only two national brands in Australia. They currently control 20% of the funeral market and about 15% of the crematoria and cemeteries market. They have room to grow via acquisitions and consolidation of independently owned funeral homes. While dwindling consumer sentiment may lead to less costly funeral arrangements, the company could experience growth in the crematoria market. With a P/E of 27.09 against a sector average of 11.71, some analysts feel the stock is overpriced. The dividend is solid and the low P/EG of .80 and the earnings forecast suggest positive things going forward.
Ramsey Health Care (RHC)
Ramsey Health Care is both owner and operator of private hospitals in Australia, as well as in Indonesia, France, and the UK. In total, they have 117 hospitals and day surgery facilities throughout their locations. Despite their solid performance and growth forecasts, brokers are somewhat sceptical about the company, with recent recommendations including several holds with one sell and only one buy rating. Concerns revolve around the regulatory environment for private health providers in both the UK and Australia. The average investor relying on ordinary common sense wonders whether some of these brokers are aware of the impending retirement of thousands of baby boomers, many of whom may not be willing to wait for treatment through a nationalised public health care outlet.
Sigma Pharmaceuticals (SIP)
Sigma is one of only three Australian companies that act as wholesale distributors to pharmacies across Australia. While their shares ran counter to the market in 2011 and show strength in mid 2012, the analyst community is bearish on this company, for two reasons. The first is operating in an environment where government regulation could dramatically alter the competitive landscape. The second is a decision by industry giant Pfizer to eliminate the middle man and begin selling to pharmacists directly. Although Sigma’s ownership of two of Australia’s best known pharmacy retail brands in Amcal and Guardian, as well as the new Amcal Max brand should remain profitable, uncertainty over the government’s efforts to control the cost of the PBS (Pharmaceutical Benefits Scheme), the potential intrusion of major manufacturers into direct distribution, and the growing demand for generics make this company highly risky going forward.
Domino's Pizza Enterprises (DMP)
Even if you don’t like their pizza and other offerings, there is a lot to like about their business model, although the European debt crisis has eroded some analyst confidence in the company. DMP not only holds exclusive brand and franchise rights for Domino’s locations in Australia, they are actually the largest franchisee in the world. They have operations in New Zealand, France, Belgium, the Netherlands, and Monaco. With a footprint in five countries, the Australian franchise claims they serve over 60 million pizzas a year. The problem is three of those countries are in recession and debt plagued European countries, and it is there DMP is expected to experience the most growth.
However, in Australia, recent earnings release beat analyst expectations for same store sales growth in Australia and European earnings were still solid. In Europe, Domino’s offers a low cost alternative to restaurant dining.
Telstra (TLS) and Telecom Corporation of New Zealand (TEL)
TLS is Australia’s leading telecommunications and information services company and TEL is the largest in New Zealand with some operations in Australia as well.
Both performed well last year and share price appreciation continued into 2012. With their outstanding dividends, one wonders why investors on the sidelines are not attracted by these two companies. One answer is uncertainty over the impact of the National Broadband Network in Australia and the similar Rural Broadband Initiative in New Zealand. In Australia some of that uncertainty has been removed as the details of the agreement between TLS and the new NBN Company have become clearer.
Regarding the future of these two, investors would do well to recall the role of transportation and communication networks in human development. Some believe the strength of the Roman Empire sprung not only from its army, but also from its roads. Business activity exploded along canals connecting waterways and later along improved roads and rail lines. The telegraph and later the telephone revolutionised commerce. The NBN has the capability to handle information technology advancements no one as yet has even dreamed of. Due to their size and expertise, these two companies may enjoy first mover advantage in the development of those technologies.
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