Sydney Airport Holdings Ltd (ASX: SYD) and Transurban Group (ASX: TCL) have been popular defensive stocks for a number of reasons, including; their long-term monopolies on large infrastructure assets, effective barriers to new entrants, solid earnings growth and decent yield in the current low interest rate environment.
Another listed company which I believe deserves mention in the same conversation is ASX Limited (ASX: ASX).
ASX has some similarly defensive characteristics to the infrastructure operators and over the last 12 months its share price has risen 25%, whilst Transurban and Sydney Airport are both down (0.4% and 6% respectively) for the same period.
ASX operates Australia's primary securities exchange, providing a market for trading (matching buyers and sellers) shares and derivatives as well as handling clearing and settlement, when actual money changes hands.
Essentially, every time a securities trade is completed or a new company is listed on the stock market here in Australia, ASX gets a cut of the action and adds to its revenue.
Trade volumes have continued to increase in recent years due to higher volatility in markets (as a result of events such as Brexit, the U.S Presidential election, or the GFC, etc) and advancements in technology.
In terms of providing a trading exchange, the sole competitor to ASX is Chi-X Australia. It launched in 2011 and with a much smaller share of the market. However, for clearing trades made on either exchange, ASX has enjoyed a complete monopoly. More on that later. Among its numerous other duties, the company also provides market data, compliance services and manages listed entity announcements.
Transurban toll roads have performed well in recent years and it reported strong half-year results on Tuesday.
So why is the share price still where it was 12 months ago?
Investors appear concerned regarding its lofty valuation and high level of deb that will become more costly to service as interest rates rise. In comparison, ASX has no long term debt and trades on a much cheaper trailing price/earnings ratio of 22.
It has posted solid, if unspectacular growth in earnings over the last five years and is expected to report similarly when half-year results are announced on February 17. ASX also pays a fully franked dividend yield of about 4%.
The outlook for ASX is an interesting one. In March 2016 the Australian government declared it would end ASX's monopoly on clearing after a further period of at least 18 months. Even so, treasurer Scott Morrison stated then that "a competitor in this market may never emerge, at least not for some time". This is likely due to the relatively high capital needed to establish a clearing house as well as the requirement for any potential competitor to gain regulatory approval.
At the same press conference the government announced a relaxation of ASX's ownership restrictions to bring them in-line with Australian banks and insurers. The company has been subject to takeover and merger speculation in the past. For example, in 2011 the then Gillard government blocked a proposed A$8 billion bid by the Singapore exchange.
I like ASX for its defensive qualities, however the current P/E is historically high and in my opinion expensive around the current $50 share price. I will wait for a decent pull-back before I think about adding to my holding.
