DEFENSIVE STOCKS AT THE NSE

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With inflation starting to bite hard at the Kenyan economy, some investors may opt to put their money in defensive stocks in order to preserve their capital. Many people think of investment only as an avenue for capital appreciation. They tend to forget that capital preservation is equally as important as investments can get wiped out during periods of uncertainty.

A defensive stock is one that tends to remain stable under difficult economic conditions and thus one that investors tend to want to own during uncertain times

These stocks tend to hold up in hard times because demand for their goods and services does not decrease dramatically as it may in other sectors and therefore companies which operate in defensive industries can grow revenue even in bad times.

Defensive stocks provide a constant dividend and stable earnings regardless of the state of the overall stock market. They remain stable during the various phases of the business cycle. During recessions they tend to perform better than the market; however, during an expansion phase it performs below the market.

Industries that are considered to be defensive include food, beverages, tobacco, drugs/health, oil and utilities

These companies will continue to perform well during hard times as can be seen from the following scenarios:

People still have to drink water

Soda, Tea and Coffee are nowadays considered essential in everyday life.

Beer will be consumed regardless of the economic conditions. One can argue that people even drink more alcohol during tough. I don’t disagree.

The cigarette industry subscribes to the same argument as the beer industry.

The advantage to investors in the beer and cigarette industries is that their products are addictive and the customers are hooked. They can also pass on costs to their customers when necessary thus maintaining or increasing revenue during tough economic periods.

The drug industry is a defensive one as people get sick all the time and they need medicine.

Those who drill for oil are having a ball at the moment due to the high oil prices

Water companies, power generators and power distributors are also not expected to record much reduced demand for their goods and services.

 

Investors at the Nairobi Stock Exchange (NSE) are limited in their scope of investing due to the few number of companies listed. Without going into too much detail, I will highlight some of the defensive stocks at our market.

East African Breweries Limited (EABL)

Kenyans love their beer! So much that price increases of their favourite brands will not deter them. EABL was expected to suffer from newly enacted alcohol laws, but they will probably weather the storm as they increased the prices of their products and they have customer loyalty. EABL has one of the highest dividend yields at the NSE.

British American Tobacco (BAT)

The cigarette maker has been facing price wars which have forced it to cut its prices. Counterfeit cigarettes have also been making its way into the market. BAT has for long been almost 100% of its earnings as dividends. It has been a great defensive stock in the past, though its ability to maintain its performance will be given its sternest test yet in its current financial year.

Kenya Electricity Generating Company (KENGEN)

The power producer has been focusing on adding much needed capacity to the national grid. The company is focusing on green energy with generation of electricity from hydro, geothermal and wind sources to the tune of 528MW by 2015. This has enabled it to start earning carbon credits.

The first tranche of its carbon credits of Sh300 million arising from its development of geothermal Olkaria II Unit 3 that generates 35MW of electricity will start getting paid in 2012

Kenya Power and Lighting Company (KPLC)

Fresh from a fully subscribed rights issue, the power distributor is set to improve its cash flow position by installing pre-paid meters.

Electricity demand is expected to increase steadily over the years