Three defensive shares for April
Which shares could offer a hedge against inflation?
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Inflation is biting and has hit a 30-year high as consumers and companies alike face a cost of living crisis. Energy prices have spiked by 40%, fuel costs are rising due to the war in the Ukraine and staff wage costs are also rising.
Supermarket giant Tesco has already warned investors that input cost hikes will reduce profits this year. Meanwhile, shares in Associated British Foods, owner of Primark, fell 5% this week after it said the discount store would have to increase prices to cover rising costs.
"Looking further ahead, inflationary pressures are such that we are unable to offset them all with cost savings,” said AB Food’s chief executive George Weston.
Even Lloyds Banking Group noted in its results this week that customers are tightening their belts as the cost of living crisis bites. The bank said the crisis could hit borrower’s disposable income and that it had already had 1.2m subscriptions contracts cancelled in the last six months. It also downgraded its growth forecasts for the UK economy.
So, where should investors look when times get hard? Here are three stocks we think have the resilience to weather the inflationary storm better than most.
British American Tobacco offers an inflationary safe haven
Consumer staples are a solid investment in tough times. Unfortunately, tobacco is a difficult habit to kick and is often considered a necessity to its users rather than a luxury. British American Tobacco is busy trying to switch its customers onto vaping products, which are considered safer.
The tobacco giant is also seeing strong growth from the area, although the business has yet to make a profit and the US regulator is cracking down on vaping. Sales from what it calls non-combustible products rose by over 40% to £2bn in its recent full-year results and losses reduced by 9%.
BATS says the business should make a profit by 2025, when it expects it to generate £5bn in sales. While revenues fell 0.4% to £25.7bn – as the growth of traditional tobacco products stalls around the world – profits rose by 2.7% to £10.2bn.
The company’s chief executive Jack Bowles said that 2021 had been a “pivotal year” for BATS’ strategy move into vaping products.
BATS is highly cash generative and converts profits to cash at the impressive rate of in excess of 90%. What’s more the company recently unveiled a £2bn share buyback programme, which should appeal to investors looking for income.
Shares in British American Tobacco have had a good recent run due to their obvious popularity as an inflationary hedge. However, they are still some way off their five-year high of 5,602p. Plus, considering broker Jefferies’ price target of 3,900p, they are still worth buying at 3,329p.
Legal & General shares looking oversold
BT shares could benefit from strong pricing power
Meanwhile, BT shares could also be worth a look as some investors believe that telecoms stocks could offer an inflationary hedge. Analysts at Berenberg Bank recently increased their target price on BT shares from 200p to 225p.
At 181p, they think that BT shares will benefit from the fact that there are already inflationary price increases built-into customer contracts and that the company is on a growth trajectory.
What’s more, analysts at JP Morgan say they may upgrade their rating on the shares later this year after BT scored positively on a screening exercise they did, searching for stocks with strong retail and wholesale pricing power.
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