Defensive shares help protect your portfolio in times of market volatility, but this does come at a price. Unfortunately, when markets are doing well, defensive shares could lag behind growth companies such as Xero Limited (ASX: XRO) in share price performance.
Despite what you may miss out on in terms of share price gains, defensive shares are worth adding to your portfolio for some protection in uncertain economic times. Here are 3 defensive ASX shares that I think are worth considering.
Coles Group Ltd (ASX: COL)
Coles is a supermarket giant in Australia that sells goods such as food, petrol and liquor to customers.
I believe it offers significant defensive characteristics – people need to eat and drive their cars in all economic conditions. The decision of German supermarket giant Kaufland to abandon plans to expand in Australia helps Coles cement their market power in Australia.
Coles shares have rewarded shareholders by soaring 37% in the past 12 months. The supermarket's Christmas campaign delivered 3.6% comparable sales growth in the second quarter and 2.1% in its 1H20 trading update. I believe this sales momentum will help Coles deliver a positive result this month.
AGL Energy Limited (ASX: AGL)
AGL operates in the Australian electricity and gas market and can be considered a defensive share because customers need these services in uncertain economic times to power their homes and businesses.
The groups' shares have fallen by more than 9% in the past 12 months, largely due to political pressure regarding electricity prices. At AGL's investor day in October last year, the group reconfirmed its profit guidance for profit of $780–$860 million and noted market challenges remain.
Despite challenges, AGL managed to increase its revenue from $12,865 million in FY18 to $13,273 million in FY19. Customer accounts have grown by 80,000 from FY18, per AGL's investor day presentation. I think this growth in customers is positive to AGL as it faces its ongoing challenges. Pleasingly, its net promoter score improved by 5.6 points.
Telstra Corporation Ltd (ASX: TLS)
Telstra is a telecommunications company in Australia that provides services to customers and businesses. In all economic cycles, I believe people will still use their mobile phones and internet for work and pleasure. This bodes well for the market Telstra operates in. For this reason, I think Telstra offers strong defensive characteristics.
The Telstra share price has increased by 18% in the past 12 months, and it also offers a dividend yield of 2.62%, which is better than the rates offered by the banks.
Foolish takeaway
Defensive shares generate cash flow throughout the economic cycle because the product or service offered by a particular company is still in demand, despite any economic uncertainty. This supports the ability for these companies to pay dividends and to protect against share price declines.
I believe the 3 defensive stocks above could be a handy addition to your portfolio to offer some protection in uncertain economic times.
