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Defensive Company vs Defensive Stock: Merits & Demerits

Meaning of Defensive Company

A defensive company is a kind of company whose revenue/turnover remains steady or more balanced compared to most of the other companies in the market despite the period of economic slowdown or growth.

How do these Defensive Companies sustain in economic slowdown or growth?

These defensive companies are mainly in the business of production or trading of utilities, food items, grocery items, oil, gas, electricity, water services, telecom sector, cable, healthcare establishments, etc.

These are the kind of essentials which people buy or use in their daily life no matter the economic situation.

It can be otherwise said that these are the products and services with cheap pricing and more affordable regardless of income of the people.

Merits of Defensive Companies

Due to the constant demand for their products and services, the cash flow from sales in a defensive company remains stable as well. Hence, these companies do not face troubles from their suppliers, employees, statutory payments, etc to whom regular payments are made without default.

In the competitive market, offering customers the goods or services at competitive prices may help in the growth in sales resulting in higher profits as well.

Demerits of Defensive Companies

Defensive companies may not do very well compared to other companies when the economy is booming. Such other companies are mainly in the business of luxurious goods, which people like to buy when they are prospering along with the economy.

With the growth of the economy in the country, the demand for products and services increases. Inability to meet this demand will not work in the best interest of the defensive company due to high competition from companies in similar industry.

Defensive Stock

Investors, who desire to take low risk for their portfolio and expect a stable growth in their investment, tend to invest in the stocks of the defensive company.

As the chances of an exponential growth in the defensive stocks remain quite low, investors expecting high earnings in the short term period should not invest in such stocks.

Regular dividends from defensive stocks can be expected.