If you're on the lookout for defensive options due to the uncertain economic environment, then you could do a lot worse than Lottery Corporation Ltd (ASX: TLC) shares.
That's the view of analysts at Citi, which believe the ASX 200 stock could be a great option right now.
Why is Citi bullish on this ASX 200 stock?
Although the broker acknowledges that Lottery Corp's earnings can be somewhat volatile due to the unpredictable nature of jackpot activity, over the long run it highlights that these earnings are defensive.
That's because whatever is happening in the economy, people will still have a flutter on Powerball or Oz Lotto.
In addition, the broker feels the market is underestimating the benefits of recent price increases on margins. It explains:
The Lottery Corporation (TLC) lottery earnings can be volatile depending on jackpots but are defensive over time with no correlation to the business cycle. We expect last year's Oz Lotto changes to result in a material revenue lift as the jackpot sequence normalises.
We believe the market underestimates the uplift to the contribution margin following the increase in the commission rate and cut to third party digital commissions. The potential introduction of cashless gaming in NSW is unlikely to drive higher wallet share for lotteries given international experience and differing player profiles between EGMs and lotteries.
In light of the above, Citi has initiated coverage on the ASX 200 stock this morning with a buy rating and price target of $5.70.
Based on the current Lottery Corp share price of $4.97, this implies potential upside of almost 15% for investors over the next 12 months.
In addition, the broker is forecasting a 15 cents per share dividend in FY 2023 and 18 cents per share dividend in FY 2024. This will mean fully franked yields of 3% and 3.6%, respectively.
