The Bank of England (BoE) recently suggested that we could soon see a correction in the stock markets. This will cause some investors to panic. But in my opinion there is no reason for this.

First, it is a correction, not a crash. The correction predicted by the BoE will result in a market collapse of around 10%. For it to be called a crash, the market would have to fall by 20% or more.

Second, this would not only provide some excellent buying opportunities for long-term investors, but it would also provide ways to protect their portfolios from the full force of a correction.

Defensive stocks

One way is to own defensive stocks, which I’m trying to do more of, so I recently opened a position in the consumer goods giant Unilever.

Defensive stocks can bring stability in times of volatility. They are companies that can generate reliable cash flow even during economic downturns. This is because they often provide essential goods and services that people need regardless of external factors such as the health of the economy.

There is an abundance of this type of company on the FTSE100. But there is one thing I am particularly interested in.

A solid option

I reckon Tesco (LSE:TSCO) could be a solid option and investors should consider buying it today. I’ve been keeping an eye on this stock and would happily add it to my portfolio today if I had the money.

The share price is up 7.9% year to date. Over the past 12 months it is up 26.6%. By comparison, the Footsie is up 5.9% and 10.5% respectively over the same period.

The supermarket giant is defensive by nature. After all, the food and drink it sells is a vital need for people. Tesco reported a 7.4% rise in group sales to £61.5 billion last year despite a volatile economy, underlining its strength.

Furthermore, I think the shares are a decent value at the moment, trading at a price-to-earnings ratio of 12.8, which is slightly higher than the FTSE 100 average (11). Nevertheless, I am willing to pay a small premium for a company of Tesco’s quality.

The biggest risk is competition. The rise of low-cost retailers like Aldi over the past decade has been impressive. With their low prices, they pose a real threat to companies like Tesco. Last year, Aldi achieved a market share of 10.1 percent, the first time it has ever achieved double-digit figures.

The top dog

But Tesco remains the leader with a market share of 27.4%. And this leading position gives the company a competitive advantage over its rivals.

In addition to its dominant market position, the income the stock generates is also significant, with a yield of 3.8%, above the FTSE 100 average. The dividend payout rose 11% last year to 12.1 pence per share. In April, the company also committed to buying back £1 billion worth of shares by April 2025.

The story continues

While dividends are never guaranteed, the company has a solid track record of increasing its payouts, growing at a compound annual growth rate of just over 10% over the past five years.

I think Tesco could provide some much-needed stability to my portfolio in a potential downturn, so I’d like to initiate a position sooner rather than later.

The post A defensive stock I’d like to own during a market correction appeared first on The Motley Fool UK.

Further reading

Charlie Keough holds positions in Unilever. The Motley Fool UK has recommended Tesco Plc and Unilever. The views expressed on companies mentioned in this article are those of the author and may therefore 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.

Motley Fool UK 2024