The Best Defensive Stocks to Buy

Defensive stocks are like umbrellas—you want to have them around in case economic skies darken. Companies in these sectors provide goods and services that consumers continue to purchase and use, regardless of whether times are good or bad—things like healthcare, utilities, personal care products, and tobacco.

Despite their reliable nature, defensive stocks have been struggling. The Morningstar US Defensive Super Sector Index’s trailing one-year return was 2.67%, versus 23.92% for the Morningstar US Market Index.

Are Defensive Stocks a Good Investment Today?

Notwithstanding recent results, defensive stocks currently hold appeal.

“Stocks tied to artificial intelligence have led the market higher during the past year,” explains Morningstar’s chief US market strategist, David Sekera. “While the broad market valuation has become stretched, we see a number of high-quality value stocks that have been left behind, with many of them in the defensive sectors that have lagged the broad market return.”

And while US economic growth has been stronger than expected, Morningstar’s US economics team expects growth to slow over the next few quarters—and if growth slows, undervalued stocks with defensive characteristics could outperform, he concludes.

The 10 Best Defensive Stocks to Buy Now

To create our list of the best defensive stocks to buy now, we screened for stocks that land in Morningstar’s Defensive Super Sector, which encompasses the consumer defensive, healthcare, and utilities sectors. These stocks all earn Morningstar Economic Moat Ratings of wide; they’re also all undervalued according to Morningstar’s metrics as of April 17, 2024.

1. Roche Holding RHHBY
2. British American Tobacco BTI
3. Imperial Brands IMBBY
4. Reckitt Benckiser Group RBGLY
5. Pfizer PFE
6. Ambev ABEV
7. Anheuser-Busch InBev BUD
8. The Estee Lauder Companies EL
9. Gilead Sciences GILD
10. Zimmer Biomet Holdings ZBH

Here’s a little more about each of the best defensive stocks to buy, including commentary from the Morningstar analysts who cover each company as of April 17, 2024.

Roche Holding

• Morningstar Price/Fair Value: 0.55
• Morningstar Uncertainty Rating: Low
• Market Capitalization: $195.5 Billion
• Forward Dividend Yield: 4.61%
• Sector: Drug Manufacturers—General

Our list of the best defensive stocks to buy now begins with healthcare giant Roche Holding, one of the world’s biggest pharmaceutical companies. Roche maintains a wide and defensible moat thanks to its position as the leader in oncology therapeutics and its biologics focus. Roche shares are currently trading at a 45% discount to our fair value estimate of $55.00.

We think Roche’s drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global healthcare into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche’s diagnostic expertise.

Roche’s biologics focus and innovative pipeline are key to the firm’s ability to maintain its wide moat and continue to achieve growth as current blockbusters face competition. Blockbuster cancer biologics Avastin, Rituxan, and Herceptin are seeing strong headwinds from biosimilars. However, Roche’s biologics focus (more than 80% of pharmaceutical sales) provides some buffer against the traditional intense declines from small-molecule generic competition. In addition, with the launch of Perjeta in 2012, Kadcyla in 2013, and Phesgo (a subcutaneous coformulation of Herceptin and Perjeta) in 2020, Roche has somewhat refreshed its breast cancer franchise. Gazyva, approved in CLL and NHL and in testing in lupus, as well as new bispecific antibodies Columvi and Lunsumio will also extend the longevity of the Rituxan blood cancer franchise. Roche’s immuno-oncology drug Tecentriq launched in 2016, and we see peak sales potential above $5 billion. Roche is also expanding outside of oncology with MS drug Ocrevus ($9 billion peak sales) and hemophilia drug Hemlibra ($6 billion peak sales).

Roche’s diagnostics business is also strong. With a 20% share of the global in vitro diagnostics market, Roche holds the number-one rank in this industry over competitors Siemens, Abbott, and Ortho. Pricing pressure has been intense in the diabetes-care market, but new instruments and immunoassays have buoyed the core professional diagnostics segment.

British American Tobacco

• Morningstar Price/Fair Value: 0.58
• Morningstar Uncertainty Rating: Medium
• Market Capitalization: $62.9 Billion
• Forward Dividend Yield: 10.47%
• Sector: Tobacco

Global tobacco company British American Tobacco earns a wide Morningstar Economic Moat Rating owing to its cost advantage, economies of scale, and intangible assets such as consumer brand loyalty. This undervalued defensive stock to buy is trading at a 42% discount relative to our $49.00 fair value estimate.

The advent of e-cigarettes has created the most significant change in the tobacco industry since the 1960s. Early forms of e-cigarettes have existed for a generation, but with the consumer arguably less brand-loyal and more aware of health issues than ever before, the industry is undergoing a shift to next-generation nicotine-based products. It seems likely that cigarettes will remain the driving force of the industry profit pool for the next decade, but Big Tobacco manufacturers are nevertheless placing their bets on new categories most likely to win share of smokers.

To date, British American Tobacco arguably has the most hedged position across emerging categories. It has two GBP 1 billion NGP (next-generation products) brands, based on 2022 revenue. In vaping, Vuse was part of the Reynolds American acquisition in 2017, and is now the leading global vaping brand in value terms. In heated tobacco, Glo has gained some traction in several markets, but lags the leadership position of Philip Morris International’s iQOS. BAT is also present in the growing modern oral category, with Velo pouches. The company has targeted GBP 5 billion in revenue to be generated from NGPs by 2025, and we think this is ambitious. NGP revenue was only GBP 3.3 billion in 2023, and while divisional revenue grew at a 29% CAGR since 2018, we expect adoption of heated tobacco to slow globally without transformational innovation. As well, the firm now faces greater competition in the US from Altria’s acquisition of Njoy, the partnership between Altria and Japan Tobacco in heated tobacco, and the likely re-entry of iQOS in the US by 2025.

However, we do not think revenue growth is the optimal key performance indicator of NGP performance, as we have doubts over the profitability of vaping, which has lower barriers to entry and lower margins than the traditional tobacco categories. BAT’s NGP business only became profitable in 2023, which implies that significantly greater scale will be required if NGPs are to ever replicate the margins and cash flow generation of the declining cigarette business.

Imperial Brands

• Morningstar Price/Fair Value: 0.60
• Morningstar Uncertainty Rating: Medium
• Market Capitalization: $18.4 Billion
• Forward Dividend Yield: 8.53%
• Sector: Tobacco

We think Imperial Brands, with a cigarette portfolio that generates some of the highest margins in the tobacco industry, has more opportunities ahead as it implements a five-year strategy. This defensive stock is 40% undervalued; we think it’s worth $36.00 per share.

Stefan Bomhard unveiled a five-year strategic plan in 2021 that will concentrate Imperial’s investments geographically and on emerging categories that are likely to become the largest profit pools in the future. The plan essentially recognizes Imperial’s place in most markets—it is a fast follower, rather than a leader. This makes Imperial a different investment proposition than its Big Tobacco peers, particularly Philip Morris International, which is investing in growth and moving away from the secular decline of the cigarette industry. Imperial, on the other hand, is likely to be the company more exposed to cigarettes, and although it should trade at a discount to its peer group, Imperial should remain a highly profitable and cash-generative business.

Under the new strategy, investment is focused on categories and geographies where Imperial has existing strengths, and where consumer demand is likely to be strong. In the core cigarette business, for example, Imperial prioritizes five tobacco markets (US, UK, Germany, Spain, and Australia) in which it holds significant share and which in aggregate represent more than 70% of Imperial’s tobacco operating profit. Other markets, as well as the firm’s smaller brands, are being managed to maximize cash flow. In next-generation products, Imperial has exited vaping markets in which it has not gained traction, in order to target its investments on more profitable opportunities. In heated tobacco, it is shifting its geographic focus from Japan, where it has very limited share and distribution structure, to Europe, where it has pockets of large shares.

The evidence so far is very promising. In fiscal 2022 and 2023, Imperial won aggregate share in its target markets, in a reversal of recent trends; grew organic revenue modestly as price/mix more than offset volume declines; and did so without a major margin reset. A critical tenet of the investment thesis is returns to shareholders, and the company recently initiated a GBP 1 billion 12-month buyback program, which we think is repeatable in most environments, and has headroom to grow the dividend steadily.

Reckitt Benckiser

• Morningstar Price/Fair Value: 0.60
• Morningstar Uncertainty Rating: Medium
• Market Capitalization: $36.4 Billion
• Forward Dividend Yield: 4.68%
• Sector: Household and Personal Products

Our analyst sees possibilities going forward for Reckitt Benckiser as it recovers from an accounting correction and navigates a series of baby formula lawsuits. This cheap household and consumer health products defensive stock trades at a 40% discount to our fair value estimate of $17.10.

Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene, which should translate into growth ahead of its peer group in the midterm. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition—a segment with pricing power and generally sound margins. However, the timing of the transaction, ahead of a period of declining birthrates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain. While we believe the segment’s reduced size presents an opportunity for management to refocus on faster-growing businesses—positioning them for longer-term success past the peaks in demand generated by the coronavirus pandemic—further secular declines in birthrates in the US could continue to be a drag to the company’s mid-single-digit growth ambitions. Nonetheless, we expect the worst is behind the company.

Reckitt’s pricing muscle will also bear its strongest test in the current highly inflationary environment. We are cautious about price decisions that are too aggressive and could impact the consumption of some of its products but believe the company is well positioned to deliver superior price/mix through its portfolio of strong brands and its advantaged category mix.

Further supporting top-line growth, the productivity program started in 2020 that now stands at GBP 2 billion over four years has enabled management to reinvest around GBP 1 billion so far in key areas such as research and development and e-commerce. We believe these investments were necessary as Reckitt was at risk of falling behind peers in its customer acquisition investments.

We don’t see large portfolio restructuring as part of its strategy in the near term. We expect Reckitt to continue to make marginal portfolio adjustments, acquiring fast-growing brands that complement its existing portfolio, especially in the consumer health sector.

Pfizer

• Morningstar Price/Fair Value: 0.61
• Morningstar Uncertainty Rating: Medium
• Market Capitalization: $145.4 Billion
• Forward Dividend Yield: 6.54%
• Sector: Drug Manufacturers—General

Drugmaker Pfizer, one of the world’s largest, is priced at a 39% discount to our fair value estimate of $42.00. The company continues its transition away from coronavirus vaccine revenue, helped by a pipeline that includes other vaccines, cancer treatments, and cardiovascular drugs.

Pfizer’s foundation remains solid, based on strong cash flows generated from a basket of diverse drugs. The company’s large size confers significant competitive advantages in developing new drugs. This unmatched heft, combined with a broad portfolio of patent-protected drugs, has helped Pfizer build a wide economic moat around its business.

Pfizer’s size establishes one of the largest economies of scale in the pharmaceutical industry. In a business where drug development needs a lot of shots on goal to be successful, Pfizer has the financial resources and the established research power to support the development of more new drugs. Also, after many years of struggling to bring out important new drugs, Pfizer is now launching several potential blockbusters in cancer and immunology.

Pfizer’s vast financial resources support a leading salesforce. Pfizer’s commitment to postapproval studies provides its salespeople with an armamentarium of data for their marketing campaigns. Further, leading salesforces in emerging countries position the company to benefit from the dramatically increasing wealth in nations such as Brazil, India, and China.

Pfizer’s 2020 move to divest its off-patent division Upjohn to create a new company (Viatris) in combination with Mylan should drive accelerating growth at the remaining innovative business. With limited patent losses and fewer older drugs, Pfizer is poised for steady growth (excluding the more volatile covid-19 product sales) before a round of major patent losses hit in 2028.

We believe Pfizer’s operations can withstand eventual generic competition; its diverse portfolio of drugs helps insulate the company from any one particular patent loss. Following the merger with Wyeth several years ago, Pfizer has a much stronger position in the vaccine industry with pneumococcal vaccine Prevnar. Vaccines tend to be more resistant to generic competition because of their manufacturing complexity and relatively lower prices.

Ambev

• Morningstar Price/Fair Value: 0.63
• Morningstar Uncertainty Rating: Medium
• Market Capitalization: $36.2 Billion
• Forward Dividend Yield: 6.68%
• Sector: Beverages—Brewers

Defensive stock Ambev is 37% undervalued relative to our $3.60 fair value estimate. The largest brewer in Latin America and the Caribbean, Ambev also produces PepsiCo products for Brazil and owns Argentina’s largest brewer, Quinsa.

Brahma, the Brazilian brewer, was the first foray into the consumer product manufacturing industry by private equity group 3G. In 2000, 3G merged two Brazilian brewers; Brahma and Antarctica, creating Ambev. The company has gone on to roll up brewers throughout Central and South America and holds several monopolylike positions in large markets, including an 81% volume share in Argentina, 68% in Brazil, and 61% in Peru.

In part because of the favorable industry structures, and in part because of its 3G heritage, Ambev is a highly profitable business. The company has a well-entrenched cultural focus on cost management, and implemented zero-based budgeting over a decade ago. Ambev’s largest market is Brazil, which represented 54% of total beverage net revenue and 49% of EBIT in 2022. However, until coronavirus-related social distancing measures prompted the closure of on-trade in some markets, Ambev’s beer EBIT margin in Brazil had been in the mid-30% range, among the highest in the global beer industry, though it had faded from above 40% a decade ago. In 2022, that margin troughed at under 21% but recovered somewhat to just under 23% in 2023.

We believe rebuilding margins is important to the investment case. In our view, the most likely and significant boost to profitability would be a reversion to the historical mean of commodity costs. We estimate the company faced around BRL 3 billion in higher raw material costs in 2022, and a reversal of that by the end of 2024 would increase the gross margin by 3 percentage points, all else equal. In practice, we anticipate that some of the cost relief will be passed to the consumer, but lower costs will be beneficial to margins to a large degree.

Premiumization should be a long-term growth and margin driver. According to Euromonitor, the premium beer segment represented 16% of Brazil’s beer volume in 2022, around half that of the US, and was responsible for most of the industry volume growth between 2016 and 2022. Ambev’s portfolio of local premium brands, as well as its access to Anheuser-Busch InBev’s global portfolio, position it to benefit from a strong mix effect in the medium term.

Anheuser-Busch InBev

• Morningstar Price/Fair Value: 0.63
• Morningstar Uncertainty Rating: Medium
• Market Capitalization: $112.7 Billion
• Forward Dividend Yield: 1.44%
• Sector: Beverages—Brewers

Anheuser-Busch InBev earns a wide moat rating based on its global scale and diverse brand portfolio. It has the leading market share in the US, and strength in other countries through its stake in Ambev. This defensive stock to buy trades 37% below our fair value estimate of $58.00.

Anheuser-Busch InBev, or AB InBev, has been acquisitive, having made transformative deals for Interbrew and Anheuser-Busch, and more recently acquiring Grupo Modelo, Oriental Brewery, and SABMiller. Management’s strategy is to buy brands with a promising growth platform, expand distribution, and ruthlessly squeeze costs from the business.

Previous acquisitions have created a monster with vast global scale as well as regional density. AB InBev has one of the strongest cost advantages in our consumer defensive coverage and is among the most efficient operators. Vast global scale, along with its monopolylike positions in Latin America and Africa give AB InBev significant fixed cost leverage and procurement pricing power. This plays out in the firm’s excess returns on invested capital and best-in-class operating and cash cycles, asset turnover ratios, and working capital management. AB InBev delays payments to trade creditors more than 20% longer than its closest rival Heineken, and its free cash flow conversion has been consistently higher than peers in recent years.

Central to the investment case are the deleveraging of the balance sheet and rebuilding of margins in Latin America. On deleveraging, some progress has been made. Net debt/EBITDA peaked (excluding the coronavirus disruption) at 5 times in 2017, the year after the SABMiller acquisition, but despite road bumps in EBITDA growth since then, was reduced to 3.5 times at the end of 2023. Nevertheless, leverage of this magnitude still increases financial risk and earnings volatility, and we think expansion will be subdued until leverage is reduced to a more manageable level.

On the margin rebuild, we expect a reversion to mean in commodity costs and the US dollar against other major currencies would go a long way to improving profitability. Mix and operating leverage should also drive margins. In Latin America and in Asia, combined almost two thirds of consolidated EBIT, the consumer is trading up to premium global brands, and ABI holds a strong portfolio with Budweiser, Corona, and Stella Artois, all strong brands in the premium segment.

The Estee Lauder Companies

• Morningstar Price/Fair Value: 0.65
• Morningstar Uncertainty Rating: Medium
• Market Capitalization: $49.0 Billion
• Forward Dividend Yield: 1.93%
• Sector: Household and Personal Products

Premium beauty brand Estee Lauder looks 35% undervalued compared with our $210.00 fair value estimate. We see an improved profit outlook for the company, driven by a step-up in consumer-valued innovations (especially in active derma skincare) and by more agile marketing and channel strategies.

As a leading provider of premium beauty products, Estee Lauder has reinforced its competitive standing with category-leading brands in skin care, cosmetics, and fragrances, in addition to retaining a preferred vendor status across brick-and-mortar and digital channels. These attributes, coupled with scale-based cost advantages, should augur a long-term competitive edge that enables the firm to deliver excess returns for more than 20 years. As such, we award Estee a wide moat rating.

We see Estee as poised to benefit from premiumization trends, as beauty consumers in developed and emerging markets alike upgrade for perceived better-quality ingredients, efficacy, and service. Outside its North America home market, we view Estee as particularly well positioned in Asia (where skin care makes up 50% of premium beauty spending), thanks to highly regarded skin care brands (La Mer and Estee Lauder) and a newly opened innovation center and factory in the region that should enable it to deliver locally relevant products in a timely fashion. Further, we think its strategy to extend its brand reach is strong, given only half of Estee’s 20-plus brands are currently available in China, India, and Brazil. In addition, we expect Estee to dial up investments in digital channels and travel retail to complement its strong ties with brick-and-mortar retailers, in order to keep Estee’s brands top of mind for consumers and ensure its products are easily accessible as beauty users shop across channels.

Despite our sanguine view on Estee, we see risks on the horizon. The premium pure-play is more exposed to macro cyclicality versus peer L’Oréal (50% in mass), as consumers tend to trade down or delay their higher-ticket discretionary spending amid recession concerns. In addition, Estee may need some time to refresh its lackluster cosmetics portfolio (except for M.A.C. and Tom Ford), leaving the firm vulnerable to market share loss to rivals L’Oréal, Shiseido, and LVMH. Furthermore, a slower-than-expected recovery in travel retail from pandemic disruptions has created uncertainties in product planning and inventory management, but we anticipate growth in the channel will resume in time.

Gilead Sciences

• Morningstar Price/Fair Value: 0.69
• Morningstar Uncertainty Rating: Medium
• Market Capitalization: $83.9 Billion
• Forward Dividend Yield: 4.58%
• Sector: Drug Manufacturers—General

Gilead Sciences offers therapies to treat infectious diseases, with a portfolio focused on HIV and hepatitis B and C. We estimate that Gilead holds a more than 60% share of the nearly $30 billion global branded HIV market. Shares of this defensive stock are priced at a 31% discount to our fair value estimate of $97.00.

Gilead Sciences generates stellar profit margins with its HIV and hepatitis C virus, or HCV, portfolio, which requires only a small salesforce and inexpensive manufacturing. We think its portfolio and pipeline support a wide moat, but Gilead needs HCV market stabilization, strong continued innovation in HIV, solid pipeline data, and smart future acquisitions to return to growth.

Gilead’s tenofovir, or TDF, molecule—in Viread, Truvada, and older single-tablet regimens—historically formed the heart of the firm’s $17 billion HIV franchise. The newest combo pills—replacing TDF with TAF—reduce bone and kidney safety issues and are seeing rapid uptake. Gilead’s biggest competitive threat in HIV is GSK, which has launched two-drug regimens based on its integrase inhibitor Tivicay (Juluca in 2017 and Dovato in 2019). However, Gilead’s Genvoya (2015), Odefsey (2016), Descovy (2016), and Biktarvy (2018) launches push patent protection into the 2030s and are boosting the company’s market share. Novel drug lenacapavir also has potential to further extend Gilead’s patent protection and serve patients in both prevention and treatment markets.

The $11 billion Pharmasset deal brought key HCV drug Sovaldi, which established Gilead as the leader in a massive (if short-lived) market. Gilead’s HCV sales peaked at more than $19 billion in 2015. However, demand has been shrinking as patients are cured, and competition from AbbVie and Merck has led to significant price discounting, and we expect Gilead’s sales in this market could fall below $1 billion by 2028.

Gilead is building a pipeline outside of HIV and HCV through acquisitions. The acquisition of Kite (CAR-T therapy Yescarta) is beginning to generate significant sales growth as the drug is used in earlier-stage patients, and the 2020 acquisitions of Forty Seven (CD47 antibody magrolimab) and Immunomedics (breast cancer drug Trodelvy), as well as a collaboration with Arcus, add to the oncology pipeline. Gilead’s Veklury is also a leading treatment for SARS-CoV-2; it generated $5.6 billion in sales in 2021, and although sales are declining, we think an oral antiviral in testing could have some long-term sales potential.

Zimmer Biomet Holdings

• Morningstar Price/Fair Value: 0.70
• Morningstar Uncertainty Rating: Medium
• Market Capitalization: $25.0 Billion
• Forward Dividend Yield: 0.79%
• Sector: Medical Devices

Our list of the best defensive stocks to buy now ends with medical device company Zimmer Biomet Holdings. The company enjoys a wide and defensible moat based on its intellectual property as well as the substantial switching costs for orthopedic surgeons. Zimmer stock is trading at a 30% discount to our fair value estimate of $175.

Zimmer Biomet is the undisputed king of large joint reconstruction, and we expect aging baby boomers and improving technology suitable for younger patients to fuel solid demand for large-joint replacement that should offset price declines. However, Zimmer stumbled into a series of pitfalls in 2016-17, including integration issues, supply and inventory challenges, and quality concerns. The firm’s efforts to turn around have been admirable, though the pandemic slowed down progress. Now the firm is seeking to capitalize on the normalization of procedure volume and placements of its Rosa robot.

Zimmer’s strategy is two-pronged. First, it is focused on cultivating close relationships with orthopedic surgeons who make the brand choice. High switching costs and high-touch service keep the surgeons closely tied to their primary vendor. This close relationship and vendor loyalty also help explain why market share shifts in orthopedic implants are glacial, at best. As long as Zimmer can launch comparable technology within a few years of its rivals, it can remain in a strong competitive position. Nevertheless, we think surgeon influence will inevitably erode, as the practice of medicine changes in response to healthcare reform. Over the long term, it will be more difficult for surgeons to run private practices profitably, and more of them will be open to employment at hospitals.

Second, the firm aims to accelerate growth through innovative products and improved execution. The latter is critical, in our view, to realizing the firm’s potential. Despite a range of structural competitive advantages, Zimmer Biomet in 2016-18 failed to shine in operations, which dragged down returns. Former CEO Bryan Hanson delivered substantial signs of progress. Now, new CEO Ivan Tornos must continue progress on Rosa robot placements, related consumable product pull-through, and expansion of the firm’s digital portfolio. Additionally, we anticipate the firm will flex its advantage in key areas, including extremities, trauma, and collaborations that involve sensor and digital technologies to improve surgical workflow.

What Are the Morningstar Economic Moat Rating and the Morningstar Fair Value Estimate?

Morningstar thinks that companies with economic moats possess significant advantages that allow them to successfully fend off competitors for a decade or longer. Companies can carve out their economic moats in a variety of ways—by having high switching costs, through strong brand identities, or by possessing economies of scale, to name just a few. Companies that we think can maintain their competitive advantages for at least 10 years earn narrow Economic Moat Ratings; those we think can successfully compete for 20 years or longer earn wide Economic Moat Ratings.

The Morningstar fair value estimate represents what Morningstar analysts think a particular stock is worth. Fair value estimates are rooted in the fundamentals and based on how much cash we think a company can generate in the future, not on fleeting metrics such as recent earnings or current stock price momentum.

How to Find More of the Best Defensive Stocks to Buy

Investors who would like to extend their search for top defensive stocks can do the following:

• Review the holdings included in the Morningstar US Defensive Super Sector Index to find more defensive stocks to investigate further.
• Use the Morningstar Investor screener to build a shortlist of defensive stocks to research and watch by screening on stocks in the healthcare, utilities, and consumer defensive sectors.