Having a portfolio full of 'defensive' stocks may help you sleep easy at night, but it could also provide a market-beating return.
The best defensive stocks are ones that aren't cyclical, that can still do well in a recession and keep growing the dividend and profit in good times or bad.
Using this process would rule out a lot of sectors like resources, financial and retail. The healthcare industry as a whole is more resilient, but there is one particular business that I think would make a great addition to any portfolio.
Invocare Limited (ASX: IVC)
Invocare is Australia's largest funeral and cemetery operator with a market capitalisation of $1.5 billion. It has been one of the most consistent stocks over the last 10 years, growing its share price by 152% and roughly doubling its dividend.
Here are three reasons why I think it could be one of the best defensive stocks to own over the next 10 years:
- Consistent demand
The sad reality of the world was captured by Benjamin Franklin when he said "there are only two things certain in life: death and taxes". Every year a certain percentage of the population will pass away and their family will want to provide a funeral.
Invocare has a market share of around 33% of the funerals each year in Australia, so as long as Invocare maintains that percentage, it has an almost certain amount of revenue each year.
Even during leaner times people will still want to provide a fitting send off to their loved ones, a funeral would be one of the last services that people want to cut corners on.
- Growth of the funeral industry
As Australia's population grows it means that more people will eventually pass away. This is particularly relevant over the next 18 years because the Australian Bureau of Statistics estimates that the 'death rate' will increase on average every year until 2034 when peaking at 2.8%.
Invocare has a clever strategy by having multiple brands so that it isn't losing market share in any particular price bracket. It has its White Lady Funerals brand for more expensive funerals, but it also has Simplicity Funerals and Value Funerals as more affordable options.
- Expansion in US
Invocare already has a strong presence in Australia, New Zealand and Singapore but it is also expanding into the USA.
It has only just started there, so its revenue is small and it isn't yet producing a profit. In FY16 the USA operations grew revenue from $0.5 million to $1.5 million. It's currently only operating in Southern California so there are many more states to expand in to.
If it can keep growing revenue by a similar percentage over the next few years then it will have a huge growth runway for the rest of the USA.
Potential downsides
There is always a risk that with Invocare's desire to make more profit every year, prices could become too high and lower cost competitors could steal market share.
Its valuation could also be a risk, it's currently trading at 25.5x FY17's estimated earnings with a grossed up dividend yield of 4.08% which is quite high for the relatively slow growth on offer.
Time to buy?
I think a stock like Invocare will probably never trade at a low valuation, but it's worth having a small position and building it in any price weakness. However, I do think now is a good time to buy our number one dividend pick for 2017.
