What Is a Defensive Company?
A defensive company is a corporation whose sales and earnings remain relatively stable during both economic upturns and downturns. Defensive companies tend to make products or services that are essential to consumers. These products are likely to be purchased whether the economy is booming or in a recession. Defensive firms tend to have long histories of surviving economic downturns.
At the opposite end of the spectrum are companies that rely heavily on the strength of the economy. These include luxury good companies, which tend to do well when consumers are financially successful and feel confident.
KEY TAKEAWAYS
- A defensive company is a corporation whose sales and earnings remain relatively stable during both economic upturns and downturns.
- Defensive companies are found mostly in specific sectors and industries.
- Most of the advantages of defensive companies are direct results of their stability.
- In many cases, their defensive nature prevents these firms from expanding rapidly.
Understanding Defensive Companies
Defensive companies are found mostly in specific sectors and industries. One can speak of defensive industries as well as defensive firms. Companies in the utility industry, for example, are defensive because consumer demand does not decline as much during downturns. Consumers need electricity, water, heating, and air conditioning, whether the economy is in a recession or not. The other primary defensive industries are consumer staples and healthcare.
Defensive companies may lag behind other firms during periods of economic expansion due to the stability of demand for their products and services. The surge in demand for discretionary goods during economic booms can sometimes detract from the profits of defensive companies.
The relative outperformance of defensive companies during economic downturns forms the basis of sector rotation strategies. In these strategies, investors overweight and underweight sectors as the economy proceeds through the business cycle.
Investing in defensive companies is usually a more profitable strategy for discouraged investors than abandoning the stock market.
Advantages of Defensive Companies
Defensive companies have attractive features for investors, employees, consumers, and national economies. Most of the advantages of defensive companies are direct results of their stability.
Investing in defensive businesses often provides long-run returns similar to other firms, but with less volatility. More importantly for long-term stock investors, defensive companies are less likely to go bankrupt because of their relative strength during recessions. Warren Buffett often invests in defensive companies, such as Coca-Cola (KO).
Employees of defensive companies have the same opportunities for promotions and higher salaries as employees of other large companies. However, they are less likely to lose their jobs during recessions because of the relative stability of their employers.
Consumers also benefit from long-term familiarity with defensive companies. Many defensive firms have been producing the same products for generations. Some of their products are found all over the world. When a consumer goes to McDonald's, they know what to expect.
Finally, having a large number of firms in defensive industries makes national economies more stable. The legendary stability of Switzerland is due in part to defensive companies like Nestlé.
Disadvantages of Defensive Companies
Defensive companies also have a few drawbacks. In many cases, their defensive nature prevents these firms from expanding rapidly. In the utility industry, they are often bound by more regulations than other businesses. In other cases, the size and influence of a particular defensive firm caused the government to place restrictions on its activities. For example, AT&T was not allowed to expand outside of the telephone business for several decades.
FAQs
What Is a Defensive Company? A defensive company is a corporation whose sales and earnings remain relatively stable during both economic upturns and downturns. Defensive companies tend to make products or services that are essential to consumers.
What is an example of a defensive company? ›
Well-established companies, such as Procter & Gamble, Johnson & Johnson, Philip Morris International, and Coca-Cola, are considered defensive stocks. Defensive stocks offer the substantial benefit of similar long-term gains with lower risk than other stocks.
What is an example of a defensive stock? ›
Defensive stocks are those that tend to provide stable earnings and consistent returns, even during an economic downturn. Shares of well-established companies in the consumer staples, utilities, and healthcare sectors are common examples of defensive stocks.
What is the best defensive stocks? ›
Why Defensive Stocks Appeal to Investors Now
| Defensive Stock | Dividend Yield |
|---|
| Consolidated Edison Inc. (ED) | 3.3% |
| Hershey Co. (HSY) | 1.6% |
| Kinder Morgan Inc. (KMI) | 6.3% |
| M&T Bank Corp. (MTB) | 4.1% |
3 more rowsThere are three main defensive sectors: Utilities, Consumer Staples, and Health Care. Utilities: Water, gas, and electric utilities are needed in all phases of the business cycle. Utilities are usually classified as US Large Value.
Is Amazon considered a defensive stock? ›
For example, some investors might argue that certain giants in the tech sector — like Amazon and Alphabet (Google's parent company) — are prosperous, life- and industry-dominant, and adaptable enough to be considered defensive stocks.
What are the 3 types of defensive strategies? ›
There are three strategies considered as essential elements of defensive strategy:
- Retrenchment.
- Divestiture.
- Liquidation.
As far as defensive stocks are concerned, McDonald's (NYSE:MCD) is a well-loved classic. The company has historically provided a lengthy track record of steady returns, making it a favorite among investors. Its widespread global presence also reduces its vulnerability to fluctuations in the U.S. economy.
Is Costco a defensive stock? ›
Consumer defensive companies are engaged in the manufacturing of food, beverages, household/personal products, packaging, or tobacco. Procter & Gamble PG, PepsiCo PEP, and Costco Wholesale COST are among the largest companies in the consumer defensive index.
Is Nike a defensive stock? ›
Cyclical stocks are generally the opposite of defensive stocks. Cyclical stocks include discretionary companies, such as Starbucks or Nike, while defensive stocks are staples, such as Campbell Soup.
In general, defense stocks (companies that produce weapons and armaments) tend to fare the best during a wartime environment. Energy companies may also see a boost in conflicts that result in higher oil and commodity prices.
What are the cons of defensive stocks? ›
Disadvantages
- #1 – Defensive Stocks can Slide Low – They can slide up or down like any other stocks. ...
- #2 – Interest Rate Factor – Defensive Stocks may be sensitive to rising interest rates. ...
- #3 – The Inflation Factor – Even if the companies raise their dividend rates, although many don't, the rise may be small.
Starter Stock Portfolio: 15 Safe Stocks To Buy
- The Home Depot, Inc. (NYSE:HD)
- Costco Wholesale Corporation (NASDAQ:COST)
- Walmart Inc. (NYSE:WMT)
- AbbVie Inc. (NYSE:ABBV)
- The Procter & Gamble Company (NYSE:PG)
- Pfizer Inc. (NYSE:PFE)
- Merck & Co., Inc. (NYSE:MRK)
- Exxon Mobil Corporation (NYSE:XOM)
Defense stocks did well in 2022, enjoying a big rally in October and far outpacing the wider stock market: the MSCI Aerospace & Defense index has seen 18.66% growth in a 12-month period. They could be a good addition to investor portfolios with the current climate.
Is PepsiCo a defensive stock? ›
PepsiCo, Inc. is one of the leading brands in the consumer staple industry whose products are enjoyed by consumers more than one billion times a day across 200 countries. It has been a great defensive play for investors, and has delivered consistent returns over a long period.
Are banks cyclical or defensive? ›
Are banks cyclical stocks? Consumer banks (those that lend money to individuals, through loans, mortgages and credit cards) generally tend to be classified as cyclical stocks, as the demand for their services increases during periods of increased economic activity.
Are defensive stocks safe? ›
Defensive stocks are important because they can provide stability and protect your investment portfolio during periods of market volatility or recession. During times of turmoil, defensive stocks are typically a safer bet than growth-focused companies, as they tend to be more risk averse.
What stocks are good during a recession? ›
9 Best Recession Stocks Of 2023
- The Best Recession Stocks of June 2023.
- Becton, Dickinson and Company (BDX)
- Thermo Fisher Scientific Inc. ( TMO)
- Merck & Company, Inc. ( MRK)
- PepsiCo, Inc. ( PEP)
- CMS Energy Corporation (CMS)
- Ameren Corporation (AEE)
- Xcel Energy Inc. ( XEL)
Practice Defensive Driving with These 5 Tips:
- Stay Focused. Cell phones are the most typical and visible distraction for drivers, especially those who don't utilize hands-free devices! ...
- Drive Slowly at Intersections. ...
- Observe Traffic Rules. ...
- Leave a Safe Following Distance. ...
- Pay Attention to Blind Spots.
the means used by companies in market leadership positions to defend their market share from attacks by challengers; six common defence strategies are position defence, flanking defence, pre-emptive defence, counter-offensive defence, mobile defence and contraction defence.
A system of controlled defensive and offensive body. movements used by police officers to respond to a subject's aggression or resistance.
Is Procter and Gamble a defensive stock? ›
Grading Defensive Stocks With AAII's A+ Stock Grades
Using AAII's A+ Investor Stock Grades, the following table summarizes the attractiveness of three defensive stocks—Colgate, Kimberly Clark and Procter & Gamble—based on their fundamentals.
Is Colgate a defensive stock? ›
Colgate-Palmolive Company is one of the best "anti-bank" defensive dividend kings you can buy, with an AA-rated balance sheet, a 60-year dividend growth streak, and historically low volatility in bear markets. Colgate's S&P risk management score is 100th percentile, in the top 80 companies on earth.
Are supermarket chains defensive? ›
As dispensers of food, drink and a variety of other consumer staples – supermarkets are often touted as prime examples of defensive stocks.
Is Home Depot a defensive stock? ›
Home Depot stock (HD) trades at 19 times versus an average of 21 times. Sure, sales of home-improvement products could decline as households spend less, but the sector also has defensive qualities.
Is Walmart a consumer defensive stock? ›
A rating of 93 puts Walmart Inc (WMT) near the top of the Consumer Defensive sector according to InvestorsObserver. Walmart Inc's score of 93 means that it ranks higher than 93% of stocks in the sector. In addition, its overall score of 97 ranks it higher than 97% of all stocks.
Is Kroger a defensive stock? ›
Kroger has defensive qualities, but a focus on inorganic growth helps the company outperform other defensive peers.
Is Tesla a buy now? ›
The EPS Rating for Tesla stock is 93 out of 99. The market status is showing a "confirmed uptrend." Tesla stock has formed a valid base but TSLA is not a buy right now. However, Tesla stock is signaling a move above the 200-day line and 200 level and is approaching its current buy point.
Is Amazon a cyclical stock? ›
Amazon is a cyclical business, as e-commerce and cloud computing are driven by consumer and business demand and are closely connected to the economy's overall health. That's part of the reason the company's growth slowed sharply in 2022.
Is Tesla a cyclical stock? ›
Tesla Is Behaving As A Deep Cyclical Business. Recent developments and massive price cuts in order to move inventory show signs that Tesla is prepared to overproduce in order take and retain market share.
1. Lockheed Martin Corp. Lockheed Martin is by far the largest defense contractor in the world. In 2017, the Bethesda, Maryland, company made $44.9 billion in arms and defense contracts, nearly twice the amount of arms sales at Boeing, the second largest defense contractor.
What is the most profitable business during war? ›
Lockheed Martin Corp. retained its place at the top of the list of the companies profiting the most from war — a position it has occupied every year since 2009. The American military contractor sold $58.2 billion-worth of arms and military services in 2020, accounting for almost 90% of the company's total sales.
What assets are best during World War? ›
"In occupied Europe during World War II, all things considered, gold was the best asset to hide in, preserve wealth, and maintain some liquidity.
Which company uses defensive strategy? ›
The purpose of a joint venture in the defensive strategy is to defeat the common competitor that is targeting both similar/dissimilar companies at the same time. For example, Microsoft and General Electric started a joint venture by the name of “Caradigm” in 2011.
What are examples of defensive statements? ›
7 examples of defensive behavior:
Making yourself the victim: "You are always so mean to me!" Returning blame to the other person: "I only did that because you did X." Counter-criticizing: "I will start doing the dishes when you start taking care of the lawn better. You are always ignoring that."
What is an example of a defensive action? ›
For example, if a person constantly shows defensive behavior, it's not a positive thing. This is when someone constantly tries to make excuses for their actions or explain why something happened or isn't their fault instead of taking responsibility for it.
What is an example of defensive acquisition? ›
Common takeover defenses include poison pills, white knights, golden parachutes, greenmails, staggered boards, and stock repurchases.
