Are these the best defensive stocks to watch?

Defensive stocks are companies whose underlying business is expected to generate reliable revenue and profits regardless of the wider economic environment. This could be because they hold a dominant market position, hold a reputation for value for money, or even simply provide the bare necessities.

Accordingly, they are usually blue-chip companies benefitting from inelasticity of demand, making them ‘safe havens.’ In other words, if they raise prices to match inflation, consumers will continue to buy the products regardless.

Defensive companies rarely deliver significant capital growth, and therefore tend to underperform during bull markets, even underperforming passive investment in indices such as the FTSE 100. But in bear markets, they can appear more attractive for the consistent earnings.

By contrast, cyclical stocks are businesses which tend to outperform in the good times and fall sharply during downturns. These might include consumer discretionary stocks, miners, or oilers, all of which depend on a healthy economy to thrive.

Investing in defensive stocks — and particularly the timing of an investment — is not simple. If you reposition your portfolio too early, you might miss out on additional growth before a downturn becomes too severe. And when the economy recovers, defensive stocks can become undervalued as investors sell in favour of growth.

This makes buying these types of shares in a bull market and then selling them in bear market a popular contrarian investing strategy; though as always, this is harder to do than it sounds.

The following FTSE 100 dividend stocks can be considered to be some of the more popular defensive companies to own in the UK as many have a reliable history of paying out. But remember, past performance is not an indicator of future returns.

Defensive stocks to watch

1. Unilever

Unilever is a multinational consumer goods company which produces a wide range of products including food, drinks, cleaning agents, beauty and personal care products. Some of its well-known brands include Dove, Ben & Jerry’s, and Hellmann's.

Operating in the consumer staples sector, Q2 sales rose by 7.9% year-over-year beating analyst consensus forecasts of 6.4% — and it expects underlying sales growth for the full year to be above 5%. Regardless of price rises, brand loyalty towards certain food staples seems to be strong.

New CEO Hein Schumacher’s ‘early immersion in the business has confirmed my belief in Unilever's strong fundamentals.’

2. Tesco

Also a consumer staples leader, Tesco is a multinational grocery operator with 27.1% of the UK market share according to Kantar.

In recent quarterly results, the company saw like-for-like large store sales surge by 9.9% year-over-year, while online market share rose by 75 percentage points to 37.5%. Pointing to its defensive nature, the retailer saw its ninth consecutive period of switching gains from premium retailers, while delivering market-leading availability of products.

CEO Ken Murphy enthuses that ‘we are pleased with our performance in the first quarter, underpinned by our relentless focus on value...by focusing on our customers we have delivered a strong start to the year. We are well-positioned for the months ahead and are reiterating our guidance for the full year.’

3. British American Tobacco

British American Tobacco is one of the world’s largest tobacco companies, boasting a brand portfolio including Lucky Strike, Dunhill, and Pall Mall. In terms of defensiveness, tobacco is a popular investing theme given the addictive nature of nicotine — though of course there is an ESG element to consider.

The company is investing heavily in alternative products such as vapes as governments continue to crack down on smoking, though most profits are still derived from traditional products. In half-year results, revenue rose by 4.4% driven by these ‘new categories,’ where revenue rose by 26.6%. Accordingly, it’s making good progress to its long-standing target to generate £5 billion from this sector by 2025.

New CEO Tadeu Marroco is ‘pleased with the resilient performance of BAT in the first half of 2023 and the renewed sense of energy across the organisation...I remain confident that New Categories will deliver a positive contribution in 2024. However, we do not expect contribution growth to be linear, as levels of investment will align with the phasing of our big innovation platforms.’

4. AstraZeneca

AstraZeneca is a multinational pharmaceutical titan which focuses on the development and commercialisation of novel prescription medicines. It works in areas such as cardiovascular, oncology, and respiratory medication — though has a presence across almost the entire development market.

Healthcare sector stocks remain highly defensive, and AstraZeneca is no exception. In half-year results, the FTSE 100’s largest company saw revenue rise by 4% to $22.3 billion, which would have been a 16% increase, if the impact of falling Covid-19 medication sales is taken into account.

CEO Pascal Soriot notes that ‘each of our non-COVID-19 therapy areas saw double-digit revenue growth, with eight medicines delivering more than $1bn of revenue in the first half, demonstrating the strength of our business...our pipeline momentum continues with eight positive pivotal trials for our Oncology medicines so far this year, and we are encouraged by the positive data from TROPION-Lung01, the first pivotal trial of datopotamab deruxtecan.’

5. National Grid

National Grid operates within the utilities sector, operating electricity and natural gas transmission across the UK and parts of northeastern United States. The need for a reliable energy network remains constant even if demand does not.

The company has invested £7.7 billion in build smart, clean energy infrastructure to boost network reliability — and found £236 million of operating cost efficiencies during 2023 to mitigate the impact of high energy prices.

CEO John Pettigrew thinks that the company’s ‘visibility of growth has been strengthened by the new five-year RIIO-ED2 price control, $3.8 billion of additional longer-term investment for our US business to drive greater connection and delivery of clean power, and Ofgem’s recent decision to award us 17 major transmission projects to enable greater levels of offshore wind connection in the UK. The opportunities for future growth are considerable.’

Overall, these five defensive stocks could be some of the best to watch in 2023.