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Three defensive shares for April

Which shares could offer a hedge against inflation?

Source: Bloomberg

Inflation is biting and has hit a 30-year high as consumers and companies alike face a cost of living crisis. Energy prices have spiked by 40%, fuel costs are rising due to the war in the Ukraine and staff wage costs are also rising.

Supermarket giant Tesco has already warned investors that input cost hikes will reduce profits this year. Meanwhile, shares in Associated British Foods, owner of Primark, fell 5% this week after it said the discount store would have to increase prices to cover rising costs.

"Looking further ahead, inflationary pressures are such that we are unable to offset them all with cost savings,” said AB Food’s chief executive George Weston.

Even Lloyds Banking Group noted in its results this week that customers are tightening their belts as the cost of living crisis bites. The bank said the crisis could hit borrower’s disposable income and that it had already had 1.2m subscriptions contracts cancelled in the last six months. It also downgraded its growth forecasts for the UK economy.

So, where should investors look when times get hard? Here are three stocks we think have the resilience to weather the inflationary storm better than most.

British American Tobacco offers an inflationary safe haven

Consumer staples are a solid investment in tough times. Unfortunately, tobacco is a difficult habit to kick and is often considered a necessity to its users rather than a luxury. British American Tobacco is busy trying to switch its customers onto vaping products, which are considered safer.

The tobacco giant is also seeing strong growth from the area, although the business has yet to make a profit and the US regulator is cracking down on vaping. Sales from what it calls non-combustible products rose by over 40% to £2bn in its recent full-year results and losses reduced by 9%.

BATS says the business should make a profit by 2025, when it expects it to generate £5bn in sales. While revenues fell 0.4% to £25.7bn – as the growth of traditional tobacco products stalls around the world – profits rose by 2.7% to £10.2bn.

The company’s chief executive Jack Bowles said that 2021 had been a “pivotal year” for BATS’ strategy move into vaping products.

BATS is highly cash generative and converts profits to cash at the impressive rate of in excess of 90%. What’s more the company recently unveiled a £2bn share buyback programme, which should appeal to investors looking for income.

Shares in British American Tobacco have had a good recent run due to their obvious popularity as an inflationary hedge. However, they are still some way off their five-year high of 5,602p. Plus, considering broker Jefferies’ price target of 3,900p, they are still worth buying at 3,329p.

Legal & General shares looking oversold

Shares in the insurer and pension annuities provider are down 10% this year to 245.3p. However, at these levels they look oversold. Recent full-year results posted in March were upbeat. Pre-tax profits increased by 39% to £2.49bn and profit after tax exceeded £2bn for the first time.

Its solvency II coverage ratio – used to measure the strength of its balance sheet – came in at 187%, compared with 175% in the previous year. Dividend seekers should also note that L&G raised the full-year dividend by 5% and that the shares currently yield a generous 7.5%.

L&G’s return on equity came in at 20.5% for 2021 compared with 17.3% in the previous year. Cash generation rose by 12%, while book value per share also rose by over 10%.

The company bullishly said that these figures mark a return to L&G’s “long-term rate of growth, having been resilient through the pandemic” and it remains positive on its near-term outlook.

Management said new business volumes are “good” and that it anticipates further growth in the UK and US markets.

BT shares could benefit from strong pricing power

Meanwhile, BT shares could also be worth a look as some investors believe that telecoms stocks could offer an inflationary hedge. Analysts at Berenberg Bank recently increased their target price on BT shares from 200p to 225p.

At 181p, they think that BT shares will benefit from the fact that there are already inflationary price increases built-into customer contracts and that the company is on a growth trajectory.

What’s more, analysts at JP Morgan say they may upgrade their rating on the shares later this year after BT scored positively on a screening exercise they did, searching for stocks with strong retail and wholesale pricing power.

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The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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