Best Defensive Stocks to Buy Now

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last updated 17 January 2024

Benjamin Graham, who is widely known as "the father of value investing," argued that defensive stocks should be moderately priced, have a good record of paying dividends and be conservatively financed.

This is what long-term value investors are looking for now. Given the volatility in the equities market and uncertainty around the economy and interest rates, investors are looking for stocks with defensive qualities.

Typically, these defensive companies generate a sufficient amount of free cash flow (FCF) that can support both dividend payments and also stock buybacks. FCF is the amount of cash flow that exceeds all the company's cash expenses (not including depreciation and amortization, for example). In addition, FCF covers the company's capital expenditure needs like new plant and equipment purchases, as well as working capital spending. What's left is "free" to be spent on dividends, buybacks, debt reduction, acquisitions of companies and cash accumulation.

It's often the case that these companies are boring. But they are profitable and can keep growing even when economic conditions are rough. In any event, they have a long history of generating good profit margins and cash flow during a variety of economic cycles. In addition, their price-to-earnings ratios are moderate and they have good dividend yields. These qualities make them good defensive plays for the long term.

Wendy's

Market value: $3.9 billion
Dividend yield: 5.3%

Moreover, its FCF is expected to rise to $270 million at the midpoint of guidance. This is more than enough to cover Wendy's $1.00 per share annual dividend, which only costs the company $206.3 million. WEN currently has 206.3 million shares outstanding, and this is expected to decrease as it buys back more of its shares. For example, the company repurchased 3.5 million shares last year for $51 million, and this year, it's on track to do the same.

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Pfizer

Market value: $159.9 billion
Dividend yield: 5.9%

However, going forward, Pfizer projects lower revenue, as the COVID-19 vaccine revenue windfall eases back in 2023. Nevertheless, it still projects non-COVID revenue will be up 6% to 8% in 2023. This should still produce enough cash flow to cover its annual dividend of $1.68 per share and keep its 5.9% dividend yield very secure. This is especially the case as Pfizer had paid a dividend for the past 34 years, including 13 consecutive years of dividend growth.

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Microsoft

Market value: $2.90 trillion
Dividend yield: 0.8%

For example, Microsoft pays a $3.00 per-share annual dividend, up 10.3% over last year, and it's likely to rise a similar amount this year. That gives MSFT an 0.8% dividend yield, not bad for a tech stock. And over the last 12 months ended June 30, 2023, Microsoft generated roughly $60 billion in free cash flow. That more than covered the $19 billion dividend cost, as well as $22 billion in share buybacks for the fiscal year.

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Coca-Cola

Market value: $259.4 billion
Dividend yield: 3.1%

As a result, investors can continue to expect that Coca-Cola will keep raising its dividend as it has for the past 61 years straight. That is quite an achievement, and is likely one reason why KO is one of Warren Buffett's favorite stocks and a long-time member of the Berkshire Hathaway equity portfolio. The famed value investor and CEO of Berkshire Hathaway (BRK.B) has held shares in the company for 35 years, since 1988. Berkshire's stake in KO stock is now up to 9.25%, according to Coca-Cola's latest proxy.

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Oracle

Market value: $292.9 billion
Dividend yield: 1.5%

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Exxon Mobil

Market value: $391.4 billion
Dividend yield: 3.9%

As for fiscal 2023, analysts expect to see lower revenue at $345.8 billion, which isn't too surprising given how far oil prices fell in the fourth quarter. Nevertheless, the company is still likely to produce a significant amount of free cash flow going forward. For example, even if FCF fell by 20% over the fiscal year, it still means Exxon produced at least $50 billion in FCF over the 12-month period.

That will be more than enough to cover the $3.80 per share annual dividend. This costs Exxon $15.2 billion annually, given that it has 4.01 billion shares outstanding. Moreover, XOM's management said that following the closing of its purchase of Pioneer Natural Resources (PXD) in 2023, it plans on buying back $20 billion in stock each year through 2025. This will drop the share count and improve earnings and dividends per share over the next several years.

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Mark R. Hake, CFA, is a Chartered Financial Analyst and entrepreneur. He has been writing on stocks for over six years and has also owned his own investment management and research firms focused on U.S. and international value stocks, for over 10 years. In addition, he worked on the buy side for investment firms, hedge funds, and investment divisions of insurance companies for the past 36 years. Lately, he is also working as Chief Strategy Officer for a tech start-up company, Foldstar Inc, based in Princeton, New Jersey.