Defensive stocks can help boost your portfolio’s returns in almost any market environment.
Even when markets around the world are in turmoil, companies such as Diageo (LSE: DGE), Unilever (LSE: ULVR) and Reckitt Benckiser (LSE: RB) can provide a safe haven.
Safe haven stocks
Due to their defensive nature, steady historic growth and cash generation, Diageo, Unilever and Reckitt will be able to weather economic turbulence more than most. Both Unilever and Reckitt produce a range of everyday essential household items, the sales of which are unlikely to collapse overnight.
Indeed, between 2006 and 2010, Unilever’s revenue expanded by nearly 12% and Reckitt’s revenue expanded by around 70%. As the world tried to navigate its way through a global financial crisis, Unilever and Reckitt continued to report sales growth.
On the other hand, Diageo has struggled recently, as falling demand for luxury spirits in China has hit weighed on growth figures. Still, over the past ten years Diageo’s revenue has increased at the steady rate of 4.1% per annum. Earnings per share have risen by 42% over the same period, and the company’s per-share dividend payout to shareholders has increased 80%.
But it’s not just steady revenue growth that makes Diageo, Unilever and Reckitt attractive safe-haven investments. They’re also attractive due to their best-in-class returns on invested capital and ability to compound shareholder equity.
Tracking returns
Return on capital employed, or ROCE for short, is a telling and straightforward gauge for comparing the relative profitability levels of companies. The ratio measures how much money is coming out of a business, relative to how much is going in, and is an excellent way to measure business success.
If you can find a company with stable ROCE that’s higher than the market average, you’re onto a winner.
And over the long term, share prices tend to track returns on capital. For example, if a business earns 6% on capital over ten years and you hold it for ten years, your return will be around 6% per annum. Similarly, if a business earns 18% on capital per annum and it manages to maintain this performance, you’re highly likely to outperform the market over the long term.
Unilever and Reckitt are both able to generate a high ROCE. In fact, over the past ten years Unilever’s average annual ROCE has been in the region of 22%. Reckitt’s ten-year average ROCE has come closer to 30% per annum. Diageo lags the pack with a ten-year average annual ROCE of 17.6%.
High returns
With returns on capital in the double-digits, Diageo, Unilever and Reckitt have all outperformed the market during the past ten years. Diageo has returned 10.3% per annum for the past decade including dividends. Unilever has returned 10.7%, and Reckitt has returned 14.9%. In comparison, over the last 10 years the FTSE 100 has returned around 5% per annum, including dividends.
