ASX utility shares can, in theory, provide that attractive combination of defensive earnings and growth. And there are a few compelling opportunities in the sector that I rate as buys.
No business is bear market-proof – share prices do fall, particularly when investors are selling indiscriminately. But, if the profit generation holds up well – and is perceived and forecast by the market to be resilient – then the share prices of these ASX defensive shares may outperform the wider market in a sell-off.
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Telstra Group Ltd (ASX: TLS)
Everyone knows Telstra, the largest ASX telco share. It has a lot of customers in a variety of segments including mobile, home broadband and business.
I don't think households, businesses or other organisations would drop their internet connection during a downturn unless they had no money to pay for it. An internet connection is also cheap and important for multiple reasons. I'd call Telstra's service essential, which could mean the revenue and profit hold up well.
During COVID-19, we saw Telstra's net profit continue to perform quite well.
These days Telstra's profit is rising thanks to thousands of new subscribers signing up every year, which helps the company's growth and operating leverage.
Telstra is expecting its underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to grow again in FY24.
If the ASX utility share can keep growing subscribers, then I think Telstra's dividend can keep rising. According to Commsec, the annual dividend per share could be 18 cents, which would be a grossed-up dividend yield of 6.6%.
Duxton Water Ltd (ASX: D2O)
Duxton Water provides an essential service to farmers in Australia – water entitlements.
Agricultural operators can use Duxton Water's water allocations through a range of supply solutions including long-term entitlement leases, forward allocation contracts and spot allocation supply.
Some farms want to have the security of water supply whether it's a wet year or not. It's particularly important in the dry years. Some farms, like almond farms, require more water than others, and these are the sorts of agricultural players that Duxton Water can provide the most value to.
Duxton Water can generate lease income, which provides a pleasing source of cash flow for the company. The ASX utility share can also benefit from the growing value of water entitlements, which can push the Duxton Water share price higher.
The next two expected dividend payments amount to 7.3 cents per share, which is a forward grossed-up dividend yield of 6.7%. It has grown its dividend every six months since 2017, though this track record isn't guaranteed to continue for the long term.
