Robert Stephens, CFA, focuses on 3 FTSE 100 companies that may offer a mix of defensive credentials and long-term growth opportunities.
Finding companies that have both defensive qualities and long-term growth potential is always a challenging task. It’s even more difficult at the moment due to the uncertainty caused across most sectors by Covid-19.
However, within the FTSE 100 are businesses such as pharmaceutical company GSK (LON:GSK), warehouse owner Segro (LON:SGRO) and tobacco company Imperial Brands (LON:IMB). They may be less affected by an uncertain economic outlook than many companies, while their long-term growth potential is bright in my opinion.
Pharmaceutical stocks are often popular among investors during periods of economic stress. This time around is no different, with GSK’s share price down 6% versus a 20% fall for the FTSE 100 in 2020.
A brief glance at the company’s latest quarterly results highlights its appeal at the moment. Its reported sales grew by 19% year-on-year, and it has maintained its guidance for the full year. That’s been a relatively unusual occurrence among FTSE 100 companies of late, given the uncertain outlook for the global economy.
In spite of this, risks such as supply chain disruption caused by Covid-19 could affect GSK. However, its price-earnings ratio of 13.5, plans to split into two companies and improving pipeline could lead to rising profitability in the long run.
Warehouse owner Segro could be a long-term beneficiary of a shift in consumer shopping patterns that has been accelerated by Covid-19. The company could experience higher demand for its warehouses as retailers shift towards online models at a quicker pace.
In the short run, the company is in a strong position to overcome difficulties such as its tenants failing to pay rent. Segro has £1.2 billion of cash and undrawn banking facilities available, while asset prices would have to fall by over 60% or rental income by 80% for it to breach its banking covenants.
The stock trades at a 20% premium to net asset value. This is a large premium compared to many of its REIT sector peers. But it appears to be positioned for long-term growth, and faces lower risks than many of its industry peers.
Tobacco companies such as Imperial Brands could be viewed more positively by investors in future. The company reported in its half-year results that it has seen a minimal financial impact from Covid-19.
In spite of its defensive credentials, Imperial Brands faces an uncertain future. It will have a new CEO from July, has underperformed some of its peers in next-generation product sales, and is expecting a global lockdown to cause challenges for its travel retail segment.
There is also a question mark as to whether e-cigarettes, heated tobacco and other next-generation products can ever fully replace the defensive growth potential of cigarettes over the long term.
However, with pricing power, strong brands and a margin of safety from its 53% share price fall over the last five years, Imperial Brands could be a relatively attractive investment prospect while it trades on a price-earnings ratio of under 7.