Atco workers at a structure assembly plant in Alberta. (Jeff McIntosh/CP)
Being an investor seems to get more stressful with each passing year. Pick your poison: plunging energy costs taking a bite out of stocks in related industries, an erratic Canadian dollar, Greece, interest rate uncertainty. And all the while, the U.S. market is touching new highs, making everyone wonder whether it is due for a tumble. And that’s just the past 12 months. Pass the Pepto.
Risk is everywhere. In order to create a robust portfolio, you need to balance that risk with defensive companies that can hold their ground when markets get rocky. That’s not to suggest they don’t perform. Indeed, at times, some of these companies can add spark to a portfolio. Great-West Lifeco is a prime example. The life insurance company, one of the 10 defensive stocks we identified in last year’s I-500, delivered a total return of 30% in the year (and change) since. More impressive, of those 10 companies, six delivered double-digit gains; only two had negative returns.
To identify these companies, we look for stocks that have a minimum market capitalization of $1 billion with an A+ debt rating from at least one of the debt-rating agencies. (This second requirement proved to be a big barrier to entry this time around. To fill out our list of 10 companies, we included three stocks—Atco and Canadian Utilities, which share management teams, and Potash Corp.—with debt ratings that are slightly below our cut-off.) From that sample, we seek out companies that have return on equity of at least 12% and a beta above 1, indicating that a company is less volatile than the market average. We also only include companies that have healthy dividend yields, to ensure the investment can generate some income for investors while they wait for share prices to rise.
Given the nature of defensive stocks, it should come as no surprise that six of the names that were on this table last year pop up again—and most of them are banks. Considering how well the Canadian financial sector has stood up to market swoons in recent years, it is a testament to their durability. The fundamentals for the bank stocks are remarkably similar to where they were last year, with dividend yields and price-to-earnings ratios virtually unchanged.
That leaves Power Financial and Potash Corp. to complete our list of defensive stalwarts. Of those two, few would argue against Power Financial’s inclusion. The insurer has a long track record of delivering consistently solid returns. Its total five-year return is above 50%. Aside from a slightly lower debt rating than we typically like, the underlying fundamentals for Potash Corp. warrant its inclusion. And while it’s endured some volatility in the past, its beta of 0.9 suggests it’s been rocked no more than the rest of the market.
The top 10 best defensive stocks:
| Company | Ticker | Market cap ($mil) | Dividend yield (%) | Return on equity (%) | Beta | Total 1-year return (%) | Debt rating |
|---|---|---|---|---|---|---|---|
| Atco Ltd. | ACO.X | 5,120.70 | 2.2 | 12.4 | 0.8 | -15.4 | S&P: A; DBRS: A- |
| Bank of Montreal | BMO | 50,913.00 | 4 | 12.8 | 0.9 | 9.1 | S&P: A+; DBRS: AA; Moody’s, Fitch: AA- |
| Bank of Nova Scotia | BNS | 80,839.30 | 4.1 | 15.6 | 1 | 4.3 | S&P: A+; DBRS, Moody’s: AA; Fitch: AA- |
| Canadian Imperial Bank of Commerce | CM | 38,526.00 | 4.4 | 16.4 | 0.9 | 3.8 | S&P: A+; DBRS: AA; Moody’s, Fitch: AA- |
| Canadian Utilities Ltd. | CU | 10,019.30 | 3.1 | 15.6 | 0.6 | -3.8 | S&P, DBRS: A |
| Great-West Lifeco Inc. | GWO | 36,997.50 | 3.5 | 15.9 | 0.8 | 25.6 | S&P, Fitch: A+ |
| Potash Corp. of Saskatchewan Inc. | POT | 32,962.20 | 4.8 | 17.1 | 0.9 | 3.7 | S&P, Moody’s: A-; DBRS: BBB+ |
| Power Financial Corp. | PWF | 26,605.00 | 4 | 15.4 | 1 | 11.9 | S&P: A+; DBRS: AA- |
| Royal Bank of Canada | RY | 115,791.30 | 3.8 | 18.8 | 0.9 | 14.3 | DBRS, Fitch: AA; S&P, Moody’s: AA- |
| Toronto-Dominion Bank | TD | 103,529.80 | 3.6 | 14.2 | 1 | 10.9 | Moody’s: AA+; DBRS: AA; S&P, Fitch: AA- |
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