Is this the ultimate defensive ASX stock?

This ASX stock has several defensive qualities.

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Given the uncertain economic outlook, investors may be looking for ASX defensive stocks to add to their portfolios.

Defensive companies typically have stable earnings, where consumer demand is unlikely to fluctuate through the economic cycle. A competitive market position and reliable dividend are also defensive qualities.

Given US President Donald Trump's tariffs, businesses with exposure to the US may be considered more volatile in today's market. ASX stocks with little or no exposure to foreign markets are likely to be considered more defensive. 

The Lottery Corporation Ltd (ASX: TLC) ticks a lot of these boxes.

What does the Lottery Corporation do?

The Lottery Corporation listed on the ASX in 2022 following the demerger from Tabcorp Holdings (ASX: TAH) in May 2022. It is Australia's leading lottery and Keno operator. It holds a portfolio of well-known brands and games, including Oz Lotto, Set for Life and Instant Scratchies. While it operates in most Australian states (except Western Australia), its strongest presence is in Queensland and New South Wales pubs and clubs.

What are its defensive qualities?

The Lottery Corporation has several defensive qualities.

Its earnings are relatively stable and unaffected by recessions. The ASX stock's broad range of products and price points allows consumers to alter the frequency of their spending and the amount per ticket. In FY24, the company increased revenue by 14% despite cost-of-living pressures. 

Being essentially a monopoly business, it has a very strong competitive position. It is Australia's leading lottery and keno provider, operating in every state except Western Australia, where LotteryWest (a government-operated business) exists. It also has long-run and generally exclusive licenses for both lotteries and keno. Specifically, it has 13 licenses and approvals, some extending to as far out as 2072. The average lotto license does not expire for 19 years, and the average Keno license 29 years. This means that its monopoly position is likely to last for decades.

The company also has a large addressable market to continue generating sales. In The Lottery Corporation's FY24 annual report, the company cited a Roy Morgan Gambling Monitor, which revealed that 53% of the Australian Adult population had purchased a lottery ticket in the past 12 months. 

Its current dividend yield is 3.14%. The company targets a dividend payout ratio of between 80% and 100% of full-year net profit after tax (NPAT). Given the stability of its earnings, its dividend payout is likely to be reliable. 

Finally, its domestic focus makes it immune from foreign tariffs. In today's environment, that's a good position to be in.

Foolish Takeaway

Given the current challenges facing equity markets, investors may be on the lookout for defensive ASX stocks. The Lottery Corporation ticks many boxes often associated with defensive businesses. Its share price is also up 2% for the year to date, significantly outperforming the S&P/ASX 200 (ASX: XJO), which has declined nearly 5% over the same period.

Motley Fool contributor Laura Stewart has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended The Lottery Corp. The Motley Fool Australia has recommended The Lottery Corp. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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