Best defensive shares to buy in Q2

Concerns over a recession in the UK have eased after the Office for Budget Responsibility (OBR) said that the British economy will not see two consecutive quarters of negative growth this year, despite previous forecasts.

However, the economy is still expected to contract overall by 0.2%, while the OBR has also warned that the UK will see the biggest drop in living standards since the 1950s, when records began.

Meanwhile, other threats – economic and military - continue to loom. The recent collapse of Silicon Valley Bank sent shockwaves through the technology sector, while this and the share price fall of Credit Suisse has led to worries over the security of the banking sector.

Analysts at Goldman Sachs and JP Morgan fear increased regulatory scrutiny of smaller banks could reduce loan growth and see US GDP fall by 0.5% to 1% over the next two years.

"Ongoing pressure could cause smaller banks to become more conservative about lending in order to preserve liquidity in case they need to meet depositor withdrawals, and a tightening in lending standards could weigh on aggregate demand," said economists at Goldman Sachs led by Jan Hatzius.

Plus, Russia’s war in the Ukraine shows no sign of let-up and tensions over China’s military expansions continue.

So what are the best defensive shares to purchase in the second-quarter of 2023?

Imperial Brands – safe port in the storm

Tobacco firms are a classic defensive investment as, while companies aren’t immune from inflationary concerns, their customers tend to continue to use their products regardless of the machinations of the economy.

As such, Imperial Brands generates a lot of cash and recently launched a £1 billion share buyback programme, as well as increasing its dividend by 1.5% at the full-year results.

At the results, Imperial Brands said it had managed to grow market share by 35 basis points, while revenues from its vaping products grew 11%. Market gains in the US, UK, Australia and Spain offset declines in Germany.

Admittedly, Imperial took a £400 million hit from its exit from Russia last year but saw this as a “point of pride” in that it was the only tobacco company to do so.

Analysts at broker Deutsche Bank Aktiengesellschaft increased their price target on the shares in November last year from 2,250p to 2,325p.

Although shares in Imperial are up 18% in the past 12 months to 1,882p, they still offer defensive qualities. What’s more, the juicy dividend yield of 7.8% should appeal to income seekers. The tobacco giant announces half-year results on 16 May.

Bodycote – set for growth

Bodycote demonstrated its resilient qualities in its recent full-year results unveiled in March. The company, which provides thermal processing services, has a market capitalisation of £1.1 billion and includes Airbus and Boeing as its clients.

Operating profits grew by 19% to £112.2 million, while revenues increased by 20.8% to £743.6 million (17.3% at constant currency rates).

The firm managed to pass on increased energy and labour costs through price increases, while net debt has reduced to £33.4 million from £51.9 million in the same period last year.

Its emerging markets division also grew revenues by 24% to £93 million over the full-year, despite the company seeing little or no growth in its Chinese markets due to the Covid lockdowns there.

Meanwhile, sales at the specialist technologies division increased by 18% to £228 million during the period and aerospace revenues are up by the same figure last year.

The company issued an upbeat outlook statement, saying that despite “macroeconomic uncertainties”, it expects underlying volume growth to continue and margin expansion.

Meanwhile, after 2023, Bodycote’s management expects “robust growth”, its civil aerospace division to benefit from higher OEM build rates and its investments in emerging markets and specialist technologies to “drive higher growth in these areas.”

Last year analysts at Berenberg Bank set a price target of 780p, albeit cutting this from 1,030p. At 606p, the shares are down by 13% over the past year but could be a good defensive option.

Serco – benefiting from long-term trends

Serco put in a resilient performance last year. The support services provider and defence contractor may have lost its Track and Trace-related work from the Covid pandemic but is working hard to replace this with other work.

The company’s order intake came in at £4.2 billion last year, while its order book increased by 8% to £14.8 billion. Meanwhile, new business came in at £8.4 billion and Serco has also introduced a £90 million share buyback programme.

The outsourcer is benefiting from the job candidate shortage, which is making it difficult for governments to recruit workers, and seeing a strong pipeline of new business.

Serco enjoyed a better-than-expected cash flow performance last year, which allowed it to cut net debt levels, and it reiterated its earnings guidance for 2023.

Analysts at broker Jefferies think the shares could reach 220p, while those at Barclays think they will hit 200p.

The shares are up 11% over the last 12 months but at 151p, they are trading some way below their year highs of 190p, last seen in July 2022.

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