Defensive stocks are clearly on everyone’s mind after markets fell dramatically at the start of August. Investors worldwide moved into risk-off mode, fearing that the U.S. economy was about to hit a snag. The sudden increase in unemployment in July was the catalyst that left many worried.
Last week’s improvement in jobless numbers has helped soothe nerves for now. However, markets are still trading lower than they were a week ago. This means it may be appropriate to consider which defensive stocks to buy on the dip.
Defensive stocks offer particular advantages during expected market volatility, as they tend to be better at conserving value. For investors looking to cash in on the recent market drop, defensive stocks can offer an opportunity to generate a more stable return on investment.
Berkshire Hathaway’s (NYSE:BRK-A, NYSE:BRK-B) famed CEO Warren Buffet is one of the investors on a more defensive footing. Last week, Buffet caused headlines by disclosing that his company had sold half of its holding of Apple (NASDAQ:AAPL) stock. The Oracle of Omaha didn’t explain why he divested his stake. Still, the shift from a relatively higher-risk tech stock to holding the largest cash haul in the company’s history suggests a defensive move.
What stocks are worth buying, given the uncertainty around the August dip? Here are three defensive stocks to buy on the dip that could ride an improving market but potentially have a strong financial position to weather a period of slower growth.
Visa (V)
Given current market conditions, one place to look for clues on good defensive stocks to buy on the dip is to consider what Warren Buffett is investing in. Visa (NYSE:VISA) stands out among Buffett’s holdings as the largest credit card company in the world in terms of market capitalization.
As the leading digital payment solutions provider in nearly every country worldwide, Visa is well-positioned as a defensive play. While it does not offer credit, it charges transaction fees. An economic downturn may lead Americans to rely more on credit cards, potentially increasing Visa’s transaction volume.
Visa has largely avoided volatility in broader markets, trading essentially flat year-to-date (YTD). This stability could relate to the company not offering growth seen in “cutting-edge” tech firms, having recently reported 9% profit growth over the last year.
Interestingly, from a defensive perspective, Visa has $19.7 billion in cash and generated $4.7 billion in free cash flow (FCF) last quarter to weather potential downturns.
Altria Group (MO)
Altria (NYSE:MO) is another defensive stock to buy on the dip. It has remained steady during recent market volatility. Its share price is higher than at the start of the month when the FOMC rate decision triggered broader market declines. Given its very loyal customer base in the tobacco industry, it makes logical sense to consider Altria a defensive play.
While long-term interest in tobacco is waning, Altria has consistently generated solid income and offers an attractive dividend yield of 7.8%. This provides a convenient option during periods of market uncertainty. Additionally, Altria indicated in its most recent earnings report that it expects earnings growth weighted toward the second half of the year, anticipating earnings will increase 2.5-4.0% over the prior year.
Analysts generally agree with the prospects for growth in the latter half of 2022 and see Altria’s earnings continuing to expand next year. Analyst price targets for Altria stock have risen lately, setting an average of $19.5 per share, implying a potential upside of 14%.
Wendy’s (WEN)
Many Americans turn to more affordable food sources like fast food as a stable defensive play during economic downturns. While McDonald’s (NYSE:MCD) is attempting to capture a higher-income customer with its McCafe coffee offerings, it is losing its reputation for cheap meals. This means that Wendy’s (NASDAQ:WEN) affordable menu makes it a compelling defensive option.
Primarily located in the United States, Wendy’s is seeing stronger same-store sales growth internationally as it expands into new global markets. With a market capitalization of $3.48 billion, Wendy’s enterprise value is less than double that amount. From a risk-averse perspective, Wendy’s offers an attractive 5.8% forward dividend yield while boasting a return on equity (ROE) of 60.65%.
Wendy’s stock trades at a reasonable price-to-earnings (P/E) ratio of 17.5x, below the S&P 500 benchmark average of 27.9x. Analyst forecasts have become increasingly positive on WEN stock, citing a potential 14% upside to its average $19.5 per share price target.
On the date of publication, Stavros Tousios did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
