What are ASX defensive stocks?
Defensive stocks are shares in (usually) mature, dividend-paying companies that tend to post consistent profits regardless of the state of the broader economy. They often operate in industries like consumer staples, healthcare, utilities, and some food and beverage businesses – particularly fast-food chains.
Demand for these products and services remains high even during an economic downturn when consumers reduce their overall spending.
We can compare defensive shares against cyclical shares, which tend to perform well only at specific financial stages.
For example, the price of shares in luxury retail brands or travel companies might increase during an economy's expansion and peak – when consumers have more disposable income to spend on high-end shopping and holidays – but will probably underperform during a recession.
The best way to think about defensive shares is to consider household spending. If money was tight and you had to cut back on your costs, what products could you not live without? Chances are, it's the stuff that defensive companies produce.
Why invest in them?
The main reason to buy defensive shares is to protect your portfolio from sudden, sharp declines in value. Because defensive companies have proven themselves to be durable and dependable over time – even in a crisis – their share prices also tend to be relatively stable. And the fact that they generally pay regular, consistent dividends makes them particularly attractive as an extra income stream.
Defensive shares won't provide anywhere near the level of returns you could gain from investing in growth shares or other more speculative stocks or asset classes. But defensive stocks also come with significantly lower risk than other types of investments, which means they can help protect your portfolio from the worst impacts of market volatility and downturns by providing stable, predictable returns.
Top defensive shares on the ASX
It has been a hard slog for financial markets recently, with the lingering impacts of the COVID-19 pandemic, conflict in Ukraine, rising interest rates, and high inflation all weighing on investors.
Trading on the ASX has been choppy, with the S&P/ASX 200 Index (ASX: XJO) edging up about 1.5% overall in 2023.Let's look at how some of the best defensive stocks have held up during these troubled times. The companies listed below are from industries typically considered defensive, like healthcare and communication services, ranked by market capitalisation from high to low.
| Company | Description |
| CSL Limited (ASX: CSL) | Biotech company specialising in vaccines |
| Telstra Group Ltd (ASX: TLS) | Leading Australian telecommunications company |
| Transurban Group (ASX: TCL) | One of the world's largest toll-road operators |
CSL
Leading Australian biotechnology company CSL is a unique case, in that its shares sometimes straddle the line between defensive stocks and growth stocks.
Given the high profit margins in the biotech industry, innovations are highly valued by the market, giving companies like CSL massive growth potential. This is reflected in its relatively high price-to-earnings ratio of 35. CSL also has a very proactive expansion strategy, using acquisitions such as Vifor Pharma to grow its revenue.
However, at the same time, many of its therapeutics – particularly its influenza vaccines – are in consistently high demand. This combination of a dependable core business and significant growth potential makes CSL a bit unreliable as an entirely defensive play.
For example, after outperforming the market in 2022, CSL shares took a significant hit in June and haven't really recovered since. The drop was in response to a disappointing market update, in which CSL flagged slower-than-expected profit growth for FY24.
This showed that the CSL share price is particularly sensitive to changes in its growth outlook, reducing its effectiveness as a defensive share. Overall, the CSL share price has now dropped over 11% over the past year, putting it well below the average performance of the ASX 200. It does pay a regular and relatively stable cash dividend though, and its annual dividend yield is about 1.3% at October 2023 prices.
Telstra
Chances are you probably view your phone and internet as essential services these days. More people are working remotely than before, and we rely much more heavily on telecommunications infrastructure to keep us all connected.
Telstra is Australia's largest telco and tends to deliver stable, positive earnings over time while also paying a consistent dividend. Its share price has remained relatively stable over the past year, showing it still has some defensive characteristics. However, like CSL, it might not quite be the defensive stock it once was, with its share price taking a hit more recently. Investors seemingly reacted negatively to news that Telstra was backing away from plans to divest part of its business.
Nonetheless, Telstra continued to pay dependable dividends throughout the pandemic, and after the recent fall in price, its annual dividend yield has increased to about 4.4% (at October 2023 prices). This potentially makes Telstra a good option for income-seeking investors.
Transurban
Transurban operates tollways in Australia, Canada, and the United States and is familiar to Melburnians as the owner of CityLink, a frequently used toll road connecting the city's major freeways. According to Transurban's website, there are more than two million daily trips on its roads.
Even during a downturn or recession, people always need to get from A to B, so demand for toll roads is likely to remain relatively high. This makes Transurban an ideal candidate as an ASX defensive share because it should maintain consistent, stable earnings over time.
Transurban shares have also held up well over the past year, increasing in price by about 2.5%. At October 2023 prices, Transurban also pays a healthy annual dividend yield of 4.6%.
Pros and cons of investing in defensive stocks
As we've discussed, the main advantage of investing in defensive stocks is it will help stabilise your portfolio's returns. This is particularly helpful when market prices are falling.
The prices of defensive shares tend to hold up reasonably well during these periods, and the dividends earned can help offset losses you might have to realise elsewhere in your portfolio.
The obvious downside is that defensive stock prices won't rise nearly as much as many other shares when the economy is booming. So, although owning a portfolio composed entirely of defensive shares might give you consistency and stability over time, it also probably means you are missing out on many other more lucrative investment opportunities.
Striking the right balance between defensive shares and other investments will depend on your risk aversion and income needs.
Are ASX defensive shares right for you?
Buying defensive shares can be a great way to give your portfolio some added stability during market volatility.
On the one hand, this means you won't have your heart in your throat every time you go to check on the value of your portfolio. However, owning defensive stocks also means you might miss out on lucrative growth opportunities when the economy is booming.
Before deciding whether defensive shares are right for you, consider your personal risk appetite, income needs, and investment time horizon.
If you are risk-averse, would like some extra income, or are approaching retirement, a portfolio weighted towards defensive shares might better suit your needs.
