3 defensive stocks for volatile times

Marcus Bogdan

Blackmore Capital

Markets have for some time been buoyant on a combination of benign economic conditions, corporate earnings growth and the presumption that Central Banks remain supportive. However, investors should remain alert to the prospect of more hazardous conditions emerging this financial year, and here we outline three stocks that would be well placed should this eventuate.


Developed equity markets have proven to be remarkably calm despite the menacing presence of rising trade tensions between US and China, and a growing determination by the US Federal Reserve to return interest rates to more “normalised” levels. A decade has passed since equity prices reached their nadir in the global financial crisis. Today, equity markets are hovering at decade or all-time highs.

However, with risks rising, It is important to assiduously focus on holding companies with sound operating models that are underpinned by resilient balance sheets. Of final importance, elevated cash levels also provide ballast to volatility and a source of capital to deploy when value resurfaces.


Woodside: In a robust financial position


One such company is Woodside Energy (WPL), Australia’s largest independent oil and gas company with a global exploration portfolio covering Australia, the Atlantic margins and sub-Saharan Africa.

WPL’s producing assets include the North West Shelf Project, Pluto LNG and non-operated Wheatstone LNG. WPL produces around 7% of global LNG supply, including operating a fleet of floating production storage and offloading facilities.


Woodside is well placed to be a major beneficiary of strengthening LNG demand growth, at a time when there is tightening supply constraints due to the lack of investment in new production. Global LNG demand is forecast to grow at around 4% per annum up to 2035.

The company’s A$2.5bn equity raising in February 2018 ensured its balance sheet is well funded with its current gearing level at 16%. Its prudent financial position should ensure it remains well positioned to invest throughout the cycle and maintain an attractive dividend payout ratio to investors. The valuation remains attractive on an Enterprise to EBITDA multiple of around 8 times, and price to book valuation of 1.3 times.



Wesfarmers: Strong balance sheet


Wesfarmers holds a portfolio of strong cash generative businesses that are well positioned in their respective industries. Importantly, Wesfarmers has retained a strong balance sheet, which underpins its capacity to reinvest in its businesses and payout an attractive dividend stream to shareholders, as well as increasing its attractiveness as a defensive investment.  

The appointment of Rob Scott as Managing Director of Wesfarmers in November 2017 has heralded a greater urgency and focus for the Group. Under his stewardship, Wesfarmers has announced a series of key initiatives:

  • The agreement to divest its UK investment Homebase;
  • The sale of Curragh coal mine for $700m;
  • Accelerated the optimisation of its Department Store Network & Target earnings improvement; &
  • Announced the demerger of Coles expected to be completed in FY19.


Caltex: Well positioned

Another company we feel is well positioned against potential volatility is Caltex, particularly following a recent upgrade in profit guidance.

We feel there is potential in unlocking shareholder value in its infrastructure assets and convenience retail business.

Caltex’s valuation remains undemanding trading on an Enterprise Value to EBITDA ratio of less than 8 times. The company’s balance sheet is robust with a net Debt/EBITDA ratio of about 0.7 times. Caltex is trading on an attractive dividend yield of around 4% with the potential scope to release surplus franking credits.




Marcus Bogdan
Chief Investment Officer
Blackmore Capital

Marcus is the co-founder and CIO of Blackmore Capital. Marcus' career spans over 27+ years focussed on Large Cap Australian Equities including work as a research analyst at McIntosh/Merrill Lynch, Portfolio Manager at Cooper Investors, and CIO...

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