The non-cyclical FTSE 100 defensives I'd buy and hold forever
It's been a rough few years for some traditionally defensive sectors such as consumer goods firms and big grocers. Changing shopping habits and discounters have tested the long-held assumption by many investors that these sectors could reliably grow throughout the business cycle. But despite issues for some traditional defensive sectors, others are still trading as strongly as they ever have.
Profiting from data
One is credit bureaux, which hoover up personal data and credit payment histories from hundreds of millions of people, synthesise the data and sell it on to financial services firms and the like that base credit acceptance decisions on the information. For market leader Experian (LSE: EXPN), this means steady revenue growth throughout the economic cycle as consumers apply for loans in recessions and boom times alike.
And the company isn't just betting on steadily growing demand from its core UK and US credit services divisions to boost long-term profits. Rather, the group is expanding into growth regions such as Latin America and Asia where consumer use of credit is growing rapidly from a small base. In the quarter to December, organic growth from Latin American operations was 7% and in Asia it was 12%, which together with strong growth in the US saw group revenue rise 5% year-on-year on a constant currency basis.
Thanks to the incredibly high barriers to entry for competitors, Experian's reams of data fetch a high price from lenders who have only two realistic competitors to consider. Last year this meant operating margins reached a whopping 24.7%. High cash flow is being used to acquire related business service companies in high-growth categories such as IT security that are already paying off.
On top of the non-cyclical nature of its business and very good growth opportunities, Experian also returns gobs of cash to shareholders. Last year this included $381m in dividends that equals a 2% yield, with an even bigger share buyback programme of $600m well on its way to completion this year. All of these positive characteristics mean Experian is pricey at 23.7 times forward earnings, but for a stable business with great long-term potential, I reckon this isn't a ridiculous price to pay.
Modern day alchemy
Also on my list is Croda (LSE: CRDA), a speciality chemicals firm that grew sales and profits straight through the financial crisis as management steered the group towards selling more chemicals for consumer goods, rather than more cyclical industrial end uses.
This change in focus has proven a goldmine in recent years as its created immense sales opportunities, evened out earnings and helped boost margins. Last year, the group's constant currency revenue grew 4.6% to £1.3bn, while adjusted operating profits increased by 6.9% to £332m.
For now, management uses the high and rising cash flow from operations to invest in its internal R&D process, acquire complementary businesses and push into other sectors such as life sciences. Like Experian, Croda isn't cheap at 24 times forward earnings, but with good growth prospects, a rapidly growing 1.7% dividend yield, and non-cyclical characteristics, its still one great business I'd love to own in my retirement accounts.
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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Experian. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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