4 Defensive Plays for the Coming Bear Market

by Susan J. Aluise | October 12, 2011 6:30 am

“Offense wins games, defense wins championships,” the ages-old football mantra goes. While football fans debate whether or not that hypothesis is true, it’s easier to prove when applied to investment strategies.

In good times, offensive stocks offer flashy earnings growth (and huge potential rewards at higher risk). Defensive stocks deliver stable income and protection when growth sectors like technology combust or when the economy goes south.

In today’s volatile market, conservative investors — particularly those nearing retirement — would do well to play a little defense. But that doesn’t mean your only play is sticking with stodgy 2% yields on 10-year T-bills. Defensive stocks focused on necessities like utilities and other consumer staples pay better yields than Treasuries, beating cyclical stocks like airlines and automakers in tough times.

Here are four defensive plays to consider for the coming bear market:

Procter & Gamble

Procter & Gamble (NYSE:PG[1]) is the ultimate defensive stock because people always will need bathroom tissue, razors, laundry detergent, shampoo and diapers. That’s why the company now boasts 24 billion-dollar brands, including Tide, Crest, Charmin, Pampers, Gillette and Duracell. In addition to by cross-selling products in the U.S, P&G is targeting international growth. Sales in emerging markets like China, Brazil and India grew 5% last year to a whopping $82.6 billion.

At $64.80, PG is trading about 12% over its 52-week low of $57.56 in August. With a market cap of $178.06 billion, the company has a price/earnings-to-growth ratio of 1.69, indicating that the stock is slightly overvalued. P&G pays a dividend yield of 3.3% and has reliably paid its dividend for more than 50 years.

Exelon Corp.

Exelon Corp. (NYSE:EXC[2]) generates power and operates electric utilities — solid defensive plays because folks must keep the lights on. EXC inked an $8 billion deal to merge with Baltimore-based Constellation Energy Group (NYSE:CEG[3]) that would further boost shareholder value. Maryland regulators and consumer groups oppose the deal (in part because of EXC’s 11 nuclear plants), but approval is likely.

At $42.61, Exelon is trading nearly 6% below its 52-week high of $45.27 in July. With a market cap of $28.24 billion, EXC has a PEG ratio of 2.1, indicating that it is overvalued. Exelon’s current dividend yield is 5%; the company has reliably paid its dividends, although it failed to raise its payout in 2006.

Sysco

Sysco (NYSE:SYY[4]) is a huge player in the wholesale, restaurant and institutional food service sector. Although a slower economy means fewer restaurant patrons, Sysco is leveraging strong customer relationships to boost sales. Management also has pursued acquisitions, too, like the recent acquisition of California food distributor Goldberg & Solovy.

SYY set a new 52-week low of $25.09 on Oct. 4 and is now trading 2.59% above that mark at $26.14. With a market cap of $15.49 billion, Sysco has a PEG ratio of 2.03, indicating that the stock is overvalued. Sysco has increased dividends reliably for more than four decades; the current yield is 4%.

Philip Morris International

Philip Morris International (NYSE:PM[5]) might be the company lawyers love to hate, but until people actually stop smoking, it will be a solid defensive play for income investors. PM, the international unit that spun off from Altria (NYSE:MO[6]) three years ago, is cashing in big these days — particularly in Asia. Signature brands like Marlboro, Chesterfield and Philip Morris boast strong loyalty in Europe — particularly in heavy-smoking German, French and Belgian markets.

At $66.05, PM is trading 9% below its 52-week high of $72.74 in July. With a market cap of $116.02 billion, the stock has a PEG ratio of 1.03, indicating the stock is fairly valued. Last month, PM hiked its dividend by more than 20%; the current yield is 4.7%. Philip Morris has reliably paid its dividend since June 2008.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned stocks.

Dividend Stocks[7]

Endnotes:

  1. PG: http://studio-5.financialcontent.com/investplace/quote?Symbol=PG
  2. EXC: http://studio-5.financialcontent.com/investplace/quote?Symbol=EXC
  3. CEG: http://studio-5.financialcontent.com/investplace/quote?Symbol=CEG
  4. SYY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SYY
  5. PM: http://studio-5.financialcontent.com/investplace/quote?Symbol=PM
  6. MO: http://studio-5.financialcontent.com/investplace/quote?Symbol=MO
  7. Dividend Stocks: https://investorplace.com/stock-types/dividend-stocks/

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