The Ultimate Defensive Portfolio

Rupert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

"'In this world nothing can be said to be certain, except death and taxes." - Benjamin Franklin

It is a fact of life that these two things are always certain at some point going to happen to someone. Although, I want to add two more points – food and water.

Food, Water, Death and Taxes would then form the ultimate defensive portfolio.  However, the only way to reap rewards from Taxes would be through Treasuries and currently the low interest rates on US government bonds are not very defensive at all. In fact, taking into account the rate of inflation it is more than likely and investor will lose money in real terms.

So this is my proposed ultimate defensive portfolio:

Company

Forward P/E

EPS Growth this Yr

Return on Equity

EPS Growth past 5-Yr

Yield

Carriage Services (NYSE: CSV)

13.3

160%

6%

15%

0.7%

Wal-Mart Stores (NYSE: WMT)

13

8.5%

23.5%

9.2%

2.3%

American States Water Company (NYSE: AWR)

19

34%

12%

11%

2.8%

Reynolds American (NYSE: RAI)

13.7

5%

24%

5%

5.5%

 

Average yield

2.8%

Carriage Services

Carriage operates in two segments – funeral homes and cemetery operations. Currently the company operates 161 funeral homes and 33 cemeteries.

There are four main funeral operators listed but I have chosen Carriage due to its current low valuation.  The stock is currently trading on a forward P/E of 13.3 compared to the industry average of 26 and on a price to cash flow multiple of 13.6 against the industry average of 15.

Unfortunately, Carriage has had a rather slow past few years but it’s getting back on track now with EPS forecast to grow 160% this year.  Despite sales and EPS only growing a slow 3.3% and 15%, respectively, over the past few years; they have beaten the industry average of a -8% decrease in sales and a 2% rise in EPS over the same period.

Carriage looks to be a solid pick for a play on one of the oldest industries around.

Wal-Mart

Next is Wal-Mart and I don’t really need to say much about this company. Wal-Mart is huge and it sells food so just by doing that it will always have customers. The company apparently has 10,130 retail units under 69 banners in 27 countries and as a result does not need to do much to make money.

Over the past 5 years EPS have grown 9.2% and sales have grown 5%.  The company produces a high return on shareholder equity of 23.5% giving a solid free cash flow to return to shareholders or buyback stock to drive up EPS.

The dividend is covered three times giving plenty of dividend security and the company is currently trading on a forward earnings multiple of 14.3, offering a discount to its peers who are currently trading on a ratio of 16.7.

As a slow steady play on the consumers demand for food Wal-Mart is the stock to own as its huge amount of retail space puts it in prime position to be the first point of call for any retail purchase.

American States Water

American States Water only makes my portfolio because of its dividend history. In fact American States has the 2nd best dividend history on the whole stock market. The company has been paying and raising its dividend every year since 1955; that is 58 years! Unfortunately, the company is beaten to the top dividend spot by Diebold who has been consistently paying and raising its dividend since 1954.

In a defensive portfolio you need a stock that offers secure dividend payments and there are few others than American States Water. The Company generates a 36% gross profit margin and has a 2.2 times dividend cover giving plenty of free cash and further room to increase the dividend.

American States gives an investor peace of mind with its dividend history and the company's product (water) will always be in demand so there are no cyclical worries.

Reynolds American

My final pick is Reynolds American although not in a sector that was originally mentioned the company does have some very defensive qualities about it.

Despite the high dividend the company is working on something not many other high yielding stocks are Reynolds is buying back debt with excess free cash flow. Although, this debt buyback is removing excess cash that would usually be used to buy back stock. This lower rate of stock buyback is leading to the company achieving a slower EPS growth rate than its competitors. However, I believe this will benefit the company in the longer term as interest rates fall and the company has even more cash to return to shareholders.

On a valuation basis Reynolds is trading below the industry average on a P/E ratio on 16 compared to the industry average of 21. Reynolds also offers a bigger dividend than average with the yield 1.6% above the industry average of 3.9%. As I have already noted RAI is reducing its debt and currently the company has a long term debt to equity ratio of 0.4 compared to the industry average of 4!

Overall

These stocks may not be glamorous or high growth but they all provide services and products that will always be in demand - leading to the perfect long term growth/buy and forget portfolio.

Data Source: Finviz,YCharts

 


RupertHargreav has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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