The O'Brien Column: Defensive stocks like breweries will weather the storm ahead

Friday 5th October 2001

Publicity about the share price performance of companies such as Air New Zealand and those associated with aviation and tourism in recent weeks crowded out comment on the resilience of several others.

They included the brewing companies DB Group and Lion Nathan, although the latter technically is no longer a New Zealand organisation, but has substantial interests here.

DB closed at $5.20 on September 21, an increase of 10c in the week of the terrorists' attacks in the US and was at $4.90 two weeks later, on September 28.

The change from $5.20 was hardly disastrous, given the increase in the week of the slump in sharemarkets.

Lion Nathan closed at $5.65 on September 14, up 15c on the week, and continued to rise until reaching $5.90 last week, after the company announced an offer for Australian wine maker Banksia Wines.

The winemaker was formed last year after the merger of two South Australian wineries, St Hallett and Tatchilla.

There was nothing unusual about brewers' shares rising in times of uncertainty.

They are classic defensive stocks, which are considered relatively stable and safe, particularly when there is likely to be an easing in economic activity or a drift into recession.

Defensive stocks tend to fall less than the "go-gos" when the economy is weakening, although they may still go down.

Conversely, they may rise at a slower rate than the growth sectors when there is an improvement in economic conditions.

Defensive stocks include utilities, basic foods, confectionery and soft drinks and others whose products (and profits) weather recessions in good shape.

Tobacco producers were considered defensive stocks but the ongoing controversy over smoking could have changed the historical perception.

There are certain things people need, irrespective of how much they are prepared to cut back in tough times.

They do not "need" international travel and its associated activities of tourism and hotel accommodation, no matter how desirable they may be.

Apart from their position as defensive stocks, DB Group and Lion Nathan have good fundamentals.

The DB interim report for the six months ended March 31 said the company had been through a major restructuring which saw its involvement with wine and spirits become limited to the Liquorland franchise.

It added a comment about being focused on beer and in becoming New Zealand's most valuable brewery.

Time will decide the validity of that goal and whether it is achieved.

DB was "cautiously optimistic" it would meet its operational and financial targets for the year."

The challenge would be the group's ability to manage cost increases with the continuing pressure caused by inflation and New Zealand's fluctuating exchange rate.

Lion Nathan will report in November on the year ended September.

Its interim report had had an almost oratorical quality when it said "the relentless focus on performance by Lion Nathan continued to deliver results both operationally and strategically in the six months ..."

The period reported on was before the company gave up on Montana, from which it should have taken a good profit.

Lion Nathan said it would seek to expand its investment in wine with its principal focus on identifying value, creating opportunities in Australasia.

Utility stocks held up comparatively well in recent weeks, subject to situations where special circumstances affected share-price performance, such as Natural Gas.

Horizon Energy, for example, lost 35c in the week ending September 14, but picked up 83c in the following week, hitting $12.10, its highest price for the year.

The distinction between retail and wholesale organisations in the electricity industry and the lines companies means it is difficult to make direct comparisons between the groups.

But they operate in a fairly stable business, apart from occasions such as the recent power crisis.

That point was noted at the company's annual meeting in August when it was said Horizon was in a low-risk sector with a dividend yield of 11% and a (then) price/earnings ratio of 11.

"One can only conclude that the company's shares are a very good investment."

The market has agreed, particularly in the past three weeks.

Investors' switches between defensive stocks and those in cyclical industries have been happening for years and will continue in future.

The defensives are currently in the ascendancy, resulting from the international economic and political situations.

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