7 Top Defensive Stocks To Buy For Q2 Earnings Season
Defensive stocks, which typically have low market risk, are getting increased attention. And these types of shares are popular because they can help protect portfolios from rapid market declines or wild swings in returns. Today, I’ll introduce seven defensive stocks to buy for the earnings season.
Despite stomach-churning volatility, especially in the early days of the pandemic, many stocks have seen double-digit returns over the past year. For instance, in the past 12 months, the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite are up about 30%, 34%, and 38%, respectively.
Yet, there is increasing concern about a potential market pullback coming soon. After all, valuations in many shares are stretched and the broader market looks expensive from a historical standpoint. The coming days will see many darlings of Wall Street report second-quarter earnings. If they fail to meet expectations, a rapid selloff could easily be on the horizon.
Thus, many market participants are now looking for high-quality defensive stocks and businesses with stable revenues and profits, strong management and in most cases dividends. In other words, potential investors need to look beyond glamorous headlines and analyze a given firm’s fundamental performance closely.
With that information, here are seven defensive stocks that could belong in long-term portfolios:
- Casey’s General Stores (NASDAQ:CASY)
- Flowers Foods (NYSE:FLO)
- Kroger (NYSE:KR)
- Nomad Foods (NYSE:NOMD)
- PepsiCo (NASDAQ:PEP)
- UnitedHealth Group (NYSE:UNH)
- Vanguard Dividend Appreciation Index Fund ETF Shares (NYSEARCA:VIG)
Now, let’s dive in and take a closer look at each one.
Defensive Stocks: Casey’s General Stores (CASY)
52-Week range: $157.05 – $229.18
Dividend yield: 0.70%
Ankeny, Iowa-based Casey’s General Stores provides self-service fuel, grocery items and freshly prepared food items such as pizza, donuts, and sandwiches. Since its first store that opened in 1968, the company has grown operations significantly. Today it operates more than 2,300 convenience stores in 16 Midwestern states, and owns nearly all of its assets. Casey’s is, in fact, one of the largest pizza chains in the country. In other words, management has established a strong niche in mostly small-towns.
Moreover, Casey’s reported financial results for the fourth quarter and full year 2021 on June 8. Total revenue increased 31.2% year-over-year (YOY) to $2.38 billion. Sales are split almost evenly between store sales and fuel.
Net income of $41.7 million showed a decline of 32.8% YOY, mainly due to the increased cost of goods sold. Diluted EPS was $1.12, also down 33%. Available liquidity was $810 million, consisting of $335 million in cash and equivalents and $475 million in undrawn borrowing capacity.
CEO Darren Rebelez stated, “We have great momentum behind our digital engagement efforts, our private brand products have resonated with our guests, our prepared foods business is regaining traction, and we are in the process of welcoming two large acquisitions to the Casey’s family. We are now poised to emerge from the pandemic an even stronger company.”
Management continues the implementation of its three-year strategic plan that started in 2020. In mid-May, Casey’s completed the acquisition of Buchanan Energy, owner of Bucky’s Convenience Stores. Investors have been pleased with these steps and the increase in cash flow levels.
Since the beginning of this year, the shares have returned over 9% and hit an all-time high (ATH) mid-May. Forward price-earnings (P/E) and price-sales (P/S) ratios are 24.57 and 0.84, respectively. Investors should keep the stock on radar to buy the dips.
Flowers Foods (FLO)
52-Week range: $21.66 – $25.48
Dividend yield: 3.45%
Thomasville, Georgia-based Flowers Foods is one of the leading packaged bakery foods providers stateside. The company has a broad portfolio of bakery products including Nature’s Own, Dave’s Killer Bread, Wonder, Canyon Bakehouse, and Tastykake.
In late 2018, management acquired Canyon Bakehouse, the top brand for gluten-free bread. Investors have welcomed this strategic move. Recent metrics show that the gluten-free food market in the U.S. is about $1.8 billion.
On May 20, FLO reported first quarter financial results. Sales narrowed 3.5% YOY to $1.3 billion. Adjusted net income was $87.6 million, up 1.3%. Adjusted EPS of 41 cents remained unchanged YOY. Cash flow from operating activities was $98.0 million, down 7.7% YOY. Cash and cash equivalents stood at $250.6 million, decreased 18.5% compared to the previous quarter.
On these results CEO Ryals McMullian said, “To maintain our momentum and sustain the growth of our brands, we are continuing to invest in innovation and marketing,” and continued, “We believe those investments benefited our results in the first quarter, and we expect them, together with our portfolio strategy, digital initiative, and efficiency programs, to drive our future performance.”
FLO shares have returned around 6.54% year-to-date (YTD), and saw a multi-year high in June. P/S and price-book (P/B) ratios are 1.19 and 3.65, respectively. High dividend yields and growth potential could be attractive for passive income investors.
Defensive Stocks: Kroger (KR)
52-Week range: $30.35 – $42.99
Dividend yield: 2.05%
Cincinnati, Ohio-based Kroger operates grocery stores across the U.S. The company runs around 2,800 retail food stores in four formats: supermarkets, multi-department stores, price-impact warehouse stores, and marketplace stores. KR provides a broad range of products such as grocery products, apparel, home electronics, pharmacies, fuel, jewelry, and cigarettes, among other products.
On June 17, KR reported first-quarter results. Sales totaled $41.3 billion, and declined 0.6% YOY. Adjusted EPS was $1.19, down 2.5% YOY. Cash stood at $360 million, also down 15.3%. Analysts concurred that the metrics showed a business that is becoming more than a traditional grocery retailer, especially as management increases its automation efforts. For instance, digital sales grew 16 YOY and 108% over the past two year.
CEO Rodney McMullen commented, “We were disciplined in driving costs out of the business and we achieved record growth in Kroger’s alternative profit business, demonstrating the power and attractiveness of our long-term model,” and added, “We are raising our guidance based on the strength of our results and we remain confident in our ability to deliver consistently attractive total shareholder return.”
KR stock is up about 28% YTD. Forward P/E and P/S ratios are 13.32 and 0.23, respectively. Currently, KR shares are trading at low valuation levels. Thus, long-term investors should consider investing around these levels.
Nomad Foods (NOMD)
52-Week range: $21.11 – $31.85
Our next stock comes from across the pond. The U.K.-based Nomad Foods is a leading global frozen foods company. Its brands include Birds Eye, Findus, Iglo, Aunt Bessie’s and Goodfella’s.
Nomad Foods released first quarter financial results on May 6. Reported revenue grew 3.6% to 707.4 million euros. Adjusted profit was 83.7 million euros, up 23.8% YOY. Adjusted EPS was 47 euro cents, an increase of 42%. Cash flows from operating activities totaled 49.3 million euros, up 4% YOY. Cash and equivalents at end of period stood at 453 million euros vs. 802.6 million euros in the same quarter prior year.
CEO Stéfan Descheemaeker said, “This year is off to a strong start with first quarter revenue and Adjusted EPS marking a record level of quarterly performance,” and added, “The combination of strong base business performance, the inclusion of Findus Switzerland and accretion from share repurchases in 2020 led to Adjusted EPS growth of 42% in Q1. These results have us on pace to deliver another stellar year for Nomad Foods.”
Investors have been pleased with the company’s leadership position in Europe, strong cash flows and share repurchases. So far this year, NOMD shares are up around 5% and hit a record high in early June. Forward P/E and P/S ratios are 14.90 and 1.75, respectively. Readers who want to diversify their portfolios with a resilient international stock should consider buying in NOMD stock, especially below $26.50.
Defensive Stocks: PepsiCo (PEP)
52-Week range: $128.32 – 156.54
Dividend yield: 2.76%
Those investors looking for further exposure to the consumer staples sector could consider buying PepsiCo, food and beverage heavyweight. Its portfolio of brands includes Frito-Lay, Gatorade, Pepsi-Cola, Quaker and Tropicana.
PepsiCo operates through several segments: Frito-Lay North America (FLNA); Quaker Foods North America (QFNA); PepsiCo Beverages North America (NAB); Latin America; Europe; Africa, Middle East and South Asia; and Asia Pacific, Australia and New Zealand and China Region.
The company recently announced robust Q2 earnings that topped expectations. Net revenue was $19.22 billion, up 20.5% from a year ago. Main contributors were NAB as well as Latin America and Europe. In addition, sales went up by 6% each in FLNA and Asia Pacific divisions. Net income was $2.37 billion vs $1.66 billion in Q2 2020. Diluted EPS was $1.70 vs $1.18 same quarter last year.
CEO Ramon Laguarta cited, “We are pleased with our second quarter results as we delivered very strong double-digit net revenue and earnings per share growth. Given the strength of our results, we now expect our full year organic revenue to increase 6% and core constant currency earnings per share to increase 11%.”
Wall Street expects the snacks business segment to provide long-term tailwinds for the company. Following the results, investors bid the shares up, and PEP stock hit an ATH. It is up 5% YTD. Forward P/E and current P/S ratios stand at 25.77 and 2.9. Dividend-growth investors should consider PEP shares in their defensive list of companies.
UnitedHealth Group (UNH)
52-Week range: $289.64 – $425.98
Dividend yield: 1.42%
Hopkins, Minnesota-based UnitedHealth Group is the largest private health insurance provider stateside, providing medical benefits to 48 million members. The company operates through four segments: UnitedHealthcare, OptumHealth, OptumInsight and OptumRx.
On July 15, UNH announced second quarter financial results. Revenues totaled $71.3 billion, grew 14.8% YOY. Net income came at $4.5 billion, and declined 34.3%. Adjusted EPS was $4.70, also down 34% YOY. Cash flow from operations was $5.5 billion. Cash and short term investments stood at $22.6 billion, up 14.1% versus the previous quarter.
CEO Andrew Witty expressed his satisfaction with the results. Management further stressed that UNH “returned $1.4 billion to shareholders in the second quarter via dividends, following a 16% increase in June 2021. In the quarter, 3.2 million shares were repurchased for $1.2 billion, bringing year-to-date repurchases to 7.9 million shares for $2.9 billion.”
UNH shares have returned nearly 18% YTD. Additionally, forward P/E and P/S ratios are 23.15 and 1.49, respectively. As the pandemic has shown, healthcare is extremely important for the functioning of our country and economy. United Health is a well-diversified industry leader in the health insurance segment. Potential investors who wait for a potential decline toward $410 would find better long-term value.
Defensive Stocks: Vanguard Dividend Appreciation Index Fund ETF Shares (VIG)
52-week range: $121.30 – $158.35
Dividend yield: 1.56%
Expense ratio: 0.06% per year
Our final choice for today is an exchange-traded fund (ETF). The Vanguard Dividend Appreciation Index Fund ETF Shares invests in firms with a solid record of increasing their dividends regularly. Seasoned investors regard dividend shares as a solid way to create passive income. Even if the price of a stock or fund falls, they can still count on those regular dividend payments.
VIG started trading in April 2006, and net assets stand around $71.9 billion. In terms of sectors, we see industrials (22.0%), followed by consumer discretionary (16.7%), healthcare (15.1%) and financials (14.1%). The fund currently has 247 holdings and the top 10 names make up about 31% of net assets.
Leading holdings include Microsoft (NASDAQ:MSFT), JPMorgan Chase (NYSE:JPM), Johnson & Johnson (NYSE:JNJ), Walmart (NYSE:WMT) and Visa (NYSE:V). These names have been darlings of the Street in recent years.
The fund returned 28% in the past year, and hit a record high in July. Interested readers could consider buying the dips in VIG, which offers the potential for long-term capital appreciation and annual dividend growth.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
