Defensive stocks have emerged as a beacon of resilience amid mounting economic uncertainties ranging from high unemployment and rising fuel costs to the looming threat of further global geopolitical tensions.
As markets remain volatile, investors are shifting their focus towards companies that promise stability and steady returns, positioning these defensive stocks as a crucial element in safeguarding portfolios.
Among the standout performers are British American Tobacco (BAT), Aspen Pharmacare, RCL Foods and Tsogo Sun — companies that, while affected by broader economic conditions, remain financially sound due to their ability to weather tough times.
With a market capitalisation of R1.62-trillion, BAT, the country’s largest and only listed tobacco group, has led the pack in recent times, with a solid one-year return of 22.93%.
The company’s strength lies in its new categories portfolio, which now accounts for 16.5% of group revenue, driven by alternative tobacco products such as Vuse, glo and Velo. Despite a slight dip in overall revenue for the 2023 financial year, BAT’s investment in these products, alongside its focus on reducing debt and improving profitability, has positioned it for continued growth.
In December BAT said it was on track to meet its 2024 financial guidance. Despite revenue declining 1.3% in the 2023 financial year, it posted 21% growth in new categories revenue and improved profitability, with adjusted operating profit up 3.9% and earnings per share (EPS) up 5.2% at constant rates. The company reported reduced debt and a 2% dividend increase.
In the food manufacturing sector, RCL Foods, SA’s largest food producer with a market capitalisation of R8.5bn, posted a 6.8% increase in revenue to R26bn for its 2024 financial year. Boosted by higher sales pricing and efficiency improvements, RCL’s earnings before interest, tax, depreciation and amortisation (ebitda) surged 36.8%, despite challenges in certain product categories. While dividends were paused during the year to focus on capital management for Rainbow, RCL is well positioned for further growth with its share price having gained more than 56% over the past year.
Aspen Pharmacare, the largest healthcare company with a market capitalisation of R74.75bn, has also been a strong performer. Despite a dip in its one-year performance of 16.22%, Aspen has shown growth over the longer term, with a five-year return of 41.51%.
Aspen’s recent moves, including acquisitions in China and Latin America and its focus on the rapidly growing GLP-1 market for diabetes and obesity treatment, have set the stage for growth. The company reported a 10% increase in revenue for financial year 2024, reflecting its ability to adapt to market challenges.
Normalised ebitda increased 1% to R11.3bn while normalised headline earnings per share remained flat at R14.92. Dividends declared to shareholders increased 5% to R3.59 from R3.42 in 2023.
Meanwhile, Tsogo Sun, a leader in the gambling and hospitality sector, has faced some headwinds. The group’s market capitalisation stands at R10.68bn after a one-year drop of 16.78%. However, despite challenges such as high diesel costs and load-shedding, Tsogo Sun posted headline earnings growth and remains a key player in the country’s hospitality industry, supported by its diverse portfolio of casinos and hotels.
Tsogo Sun reported total income of R11.5bn and adjusted ebitda of R3.9bn for the year to end-March 2024, with an ebitda margin of 34% (down from 35% the previous year). Headline earnings grew to R1.76bn from R1.59bn, but adjusted headline earnings declined slightly to R1.72bn from R1.82bn.
AB InBev, the world’s largest beer producer, has struggled recently with a one-year tumble of 24.65%.
In the 2023 financial year, the brewer recorded organic revenue growth of 7.8% to $59.4bn and 7% growth in organic normalised ebitda to $20bn. Net debt was reduced to $67.6bn and it declared a dividend of €0.82 a share. In its 2024 half year, revenue rose 2.7% to $29.9bn, with gross profit and ebitda growing 4.2% and 7.8%, respectively. Net debt increased to $70.4bn.
Foord Asset Management portfolio manager Wim Murray advises investors to avoid capital-intensive firms with high fixed costs and overstated earnings, as these pose significant risks. He said avoiding such “landmines” can greatly enhance portfolio performance.
Murray recommends focusing on resilient, cash-generative companies, particularly in defensive sectors such as food retailers.
“A big contribution to portfolio performance is simply missing the landmines. The pain is ultimately borne by investors when these businesses fail to deliver,” he said.
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