Worried about the next recession? Consider these FTSE 100 defensives

Good economic news keeps on rolling in and equity indices keep hitting fresh highs, but investors with a long memory will know from painful experience that the next recession is never too far away. With that in mind, it’s well worth considering dependable defensive shares that could hold their value when the next downturn hits.

Non-cyclical and growing fast

One sector that can depend on relatively robust demand throughout the economic cycle is pharmaceuticals. And of UK-listed pharma giants, one of my favourite is Shire (LSE: SHP). This is because the group has pivoted over the past few years to become a global leader in treatments for rare diseases, an area that commands high prices and has little competition.

In the first half of this year, the shift towards these higher-priced treatments paid off, with the group reporting a 3% constant currency uptick in revenue to $3.8bn. There was also a whopping 108% increase in operating profits, to $0.8bn, as costs related to its blockbuster Baxalta acquisition died down.

During the period, the business generated a significant $756m in free cash flow, which allowed management to reduce net debt by some $1.4bn during the period, to $17.6bn. For the time being, management will need to continuing prioritising de-leveraging rather than boosting meagre dividends. But over the longer term, there’s some income potential if management doesn’t prioritise more acquisitions.

Unfortunately for domestic investors attracted to Shire, the company is currently in the process of being acquired by Japanese pharma giant Takeda, for £49 per share. However, Shire’s current share price is significantly below this level, as many investors believe either Takeda’s nervous shareholders, or regulators, will nix the debt-fuelled deal.

With this in mind, I’m not buying shares of Shire right now. But if Takeda’s bid falls through, and Shire’s share price drops, it’s certainly one defensive stock that would high on my watch list.

Everyone loves a coke

But with Shire possibly off the table for domestic investors, I think another defensive share worth considering is Coca-Cola HBC (LSE: HBC). Coca-Cola HBC is the brand’s bottler serving 28 countries, stretching from Italy and Ireland in the west, to Russia in the east, and Nigeria in the south.

The group’s defensive characteristics are quite high as consumers tend to continue making small purchases, like a bottle of Coke, throughout the business cycle. Furthermore, with more than half of its sales coming from developing and emerging markets, such as Hungary, Ukraine and Bosnia, its fortunes are less tied to economic health in key developed markets, like Western Europe and North America, than many other FTSE 100 peers.

Over the longer-term, exposure to these markets is a big positive since they’re generally experiencing high levels of economic and population growth. In the first six months of the year, these attributes helped boost volumes sold by 4.6% year-on-year, with net revenue up 6.4% on a constant currency basis to €3.2bn. The group’s management has also implemented margin improvement measures that increased operating profits during the perod by a whopping 14.1%, to €0.3bn.

Rising sales and margins are also fueling increases to the dividend that currently yields 1.87% annually. While this yield is below the FTSE 100 average, I think the company’s defensive nature and rising profits could make it a solid, non-cyclical option for nervous investors at its current price of 21 times forward earnings.

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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Shire. 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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