2 FTSE 100 shares with defensive growth potential

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2 FTSE 100 shares with defensive growth potential
Master Investor Magazine

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With the FTSE 100 having made gains since the start of the year, investor sentiment appears to be improving. Following a challenging 2018, where risks such as a full-scale US/China trade war and the potential impact of US interest rate rises held back share prices, this year has seen a step-change in investors’ attitude to risk.

While an increasingly risk-on mentality seems to be developing, the threats facing the world economy that caused volatility in 2018 remain in place. As a result, FTSE 100 shares such as GlaxoSmithKline (LON:GSK) and AstraZeneca (LON:AZN) could prove popular due to their defensive growth potential.

Strategy

The strategies employed by the two companies could catalyse their financial performances. AstraZeneca’s recent updates have shown a return to growth, with significant investment in its product pipeline beginning to produce core earnings growth. The company intends to invest further in its pipeline, while strong growth in emerging markets suggests that it is developing an improved competitive position for the long term.

GlaxoSmithKline’s strategy is being reshaped through a pivot towards pharmaceuticals. It has disposed of its consumer healthcare nutrition brands, while entering into a joint venture with Pfizer. Alongside this, it recently acquired oncology-focused biopharmaceutical company TESARO. This could catalyse its pharmaceutical segment, while further investment may provide it with improved financial performance in future.

Defensive growth

Since both stocks are less reliant on the performance of the economy than many of their index peers, they may offer defensive appeal. Their relatively low positive correlation with the wider economy could become more desirable should the risks facing global GDP growth become increasingly severe. This may mean that investor sentiment towards the two stocks improves relative to other large-cap shares.

At the same time, AstraZeneca and GlaxoSmithKline have significant growth opportunities. The pharmaceutical industry is expected to grow at an annualised rate of 5.8% over the medium term. The expected rise in the world’s population of 29% by 2050 is expected to be a key driver, while an ageing population may mean that demand within the wider healthcare industry rises. Other factors such as strong GDP growth in major economies such as China and India, as well as higher urban pollution levels across the globe, may produce a tailwind for the industry.

Fundamentals

While AstraZeneca’s dividend payments on a per share basis have failed to grow in recent years, its return to profit growth may change that. It has a dividend yield of 3.6%, with a payout ratio of 73% suggesting that dividend growth could keep pace with profit growth over the next few years. GlaxoSmithKline’s dividend yield of 5.1% is surprisingly high, given that it has frozen dividends on a per share basis in the last few years. A payout ratio of 69% suggests that dividend growth could return as its new strategy gains momentum.


While neither stock may appear to be particularly exciting at first glance, their growth opportunities could be high. As well as this, defensive profiles and income investing potential suggest that they may offer relatively impressive total returns in the long run.

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