Is CSL Limited the best blue-chip stock for downside protection?

It’s always nice to own a few stocks that stubbornly refuse to dip when the market wavers.

In the last month the S&P ASX 200 Index (INDEXASX: XJO) is down 5.8% and the ASX All Ordinaries Index (INDEXASX: XAO) is down 5.7%.

Bank shares, which many seem to judge based on yield alone, have led the falls. For example, Commonwealth Bank of Australia (ASX: CBA) shares are down 6.77% and Westpac Banking Corp (ASX: WBC) is down 9.7%.

However not all stocks are falling. In fact, my favourite steadfast stock for the long-term investor dropped less than 1% over the last month – and it started at an already lofty valuation!

I’m referring of course to CSL Limited (ASX: CSL)a protein science company that collects and fractionates human blood as well as continually developing new treatments. You can read about CSL’s products in this article, but today I’d like to focus on two simple charts that demonstrate why the company is one of the best to own in good times and bad. 

CSL Return On Investments

This chart shows the company’s return on investments. What it demonstrates is that over time, CSL has been able to reinvest in its own business at incrementally improving rates of return. However, investors should remember that the company has limited reinvestment opportunities, and as a result it has a policy of continually purchasing its own shares on market. Which leads me to the second chart…

Capital Spending Cashflow CSL ASX

This chart shows that cashflow is growing at a faster rate than capital spending, and suggests that much of the company’s growth is due to smart allocation of capital, rather than luck. The gap between the two lines is a rough measure of free cash-flow, which is the amount of money the company can spend on paying dividends and buying back shares.

Speaking of which, at current prices the company yields only 1.8%, and it is in part this low yield that has kept me from becoming a shareholder. However, for a long-term investor who wants to minimise the risk of capital loss, CSL is a great company to own because there are many who would love to buy shares on any weakness. The odds are that if shareholders are selling CSL, it’s not because they’ve lost faith in the company, but rather because they see greater value elsewhere.

Because it is in the medical business, CSL should also benefit from the ageing population, and is unlikely to ever suffer a significant drop in demand for its products. Indeed, some of the company’s products are required to replace blood lost due to injury, or for life-saving surgery. So although no-one in their right mind would hope for those kind of emergencies, it’s easy to understand why I consider CSL a defensive investment.

The smart money knows that the real money is made by investing in lesser known stocks than CSL Limited.

Personally, I think this steadfast business is a much better defensive investment than CSL, because it's considerably better value at current prices.

Insiders evidently agree with me, because a co-founder recently bought a large number of shares at within 3% of current prices.

This company has grown its dividends per share for nine years in a row, and I doubt the share price will stay this low for long, so just click on the link below, enter your email and discover this stock now, before it's too late.

Motley Fool's number #1 Tech Pick for the 2015 Financial Year

Motley Fool contributor Claude Walker has no financial interest in any company mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.