ITC - the ultimate defensive stock


Well-Known Member
Last week there was an article in ET, asking whether investors in ITC were the 8th wonder of the world. And saying that the company doesn’t miss any opportunity to disappoint investors.

But the truth is far from what ET has quite unfairly portrayed. This is a company that is probably the perfect defensive stock. For a lot of reasons.

- It trades at relatively low multiples. 19x PE, in this market, is fantastic.

- It has an excellent and sustained dividend yield history. A 5.1% yield isn’t something to turn your nose at. It’s better than a Fixed Deposit today!

- Despite the most challenging period possible for its businesses, it is doing fairly well. Last year, hotels were impacted. Schools went totally online, impacting ITC’s Classmate line. A respiratory pandemic is the worst environment for a company that makes cigarettes. It’s fashion business took a hit with everyone sitting at home. Other than FMCG, there were headwinds everywhere!

- This is a company with extreme brand loyalty. It’s customers stick to it, literally till they die - no matter how much prices are hiked!

- Their distribution network is the stuff of legend. You can buy their products pretty much in every nook and corner of the country.

- They have an excellent advantage with opening up of the farm sector - post farm bills. They are easily the most trusted corporate by any farmer, in the entire country. ITC has been in agriculture for decades, dealing with farmers in a fair way and has earned their respect. Unlike some other corporates that are distrusted by farmers.

- But even more importantly, this is a company whose shares are in demand because its largest shareholder is eager to increase stake. So there is a clear floor in terms of share price - pretty much in any situation. And that floor is barely about 25% below where the stock is today.

Interestingly, as the government gets more and more strapped for funds, it is likely that ITC will become the natural source. This is the only stake that the government can sell, without triggering employee protests! Eliminating the FDI restriction on BAT is probably the smartest thing the government can do to increase its reward from selling ITC stake!

At a time when market seems toppish, there is nothing better than a cash rich company, that is in diversified businesses which are holding steady even in worst operating environment. If these divisions are sustaining during pandemic, they will do extremely well during the recovery!

Hold on investors. You are holding on to probably the best investment in the Indian stock market today! No reason to be unhappy.

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