Cyclical stocks, the market’s crown jewels during economic upswings, now find their allure dimmed by stretched valuations. As economic clouds gather, the spotlight shifts to defensive stocks - steady, unyielding anchors in volatile waters.
UBS' global equity team, led by Andrew Garthwaite, urges investors to pivot away from cyclicals and instead move toward growth-oriented defensive stocks.
Along with pharmaceuticals and utilities, software powerhouses like Microsoft Corporation (MSFT) and SAP SE (SAP) stand ready to weather the storm, offering resilience and reliable dividends amid an anticipated global slowdown through 2026. For investors seeking shelter and steady returns, these dividend stalwarts provide a fortress-like portfolio foundation.
Defensive Stock #1: Microsoft
Headquartered in Redmond, Washington, Microsoft Corporation (MSFT) is a tech titan with a $3.2 trillion market cap, shaping the future of both personal and enterprise tech. Known for its PC software and the Azure cloud platform, Microsoft is at the forefront of the digital revolution. From transforming operating systems to leveraging artificial intelligence (AI) for productivity, the company is constantly pushing boundaries.
MSFT stock has hit a rough patch, down 6.8% from its July peak of $468.35, weighed by a mid-July CrowdStrike (CRWD) outage and a mixed first-quarter earnings reveal. While the past three months have seen little movement, the broader picture shines - MSFT has climbed 17% over the past year.
Microsoft's valuation mirrors its status as a tech titan, trading at 33.80 times forward earnings - a premium price tag that aligns with its trillion-dollar peers. Over five years, it has consistently commanded above-average multiples, a testament to its market dominance and investors’ faith in its growth trajectory. For those eyeing the long game, this premium is not just a cost – it is the price of consistency and a bet on Microsoft’s relentless innovation and enduring leadership in the tech arena.
Microsoft’s dividend journey started in 2003, marking the beginning of a steady climb. Fast-forward to December 2024, and the tech titan kept its streak alive, declaring a $0.83 per share quarterly dividend on Dec. 3, payable to the shareholders on March 13, 2025. This boosts the annualized dividend to $3.32 per share, yielding 0.76%.
With a 25.4% payout ratio, the company balances investor rewards with relentless innovation. After two decades of consistent hikes, Microsoft inches closer to Dividend Aristocrat status, eyeing the coveted 25-year streak.
However, dividends are not the only treat for shareholders. A newly approved $60 billion share buyback program underscores the company’s commitment to returning value while fueling its growth.
Microsoft showcased its dominance in its Q1 earnings report, surpassing Wall Street’s forecasts. Revenue surged 16% year over year to $65.6 billion, while EPS jumped 10% to $3.30 - outpacing predictions by 7.1%. With operating income soaring to $30.6 billion, bolstered by a 46.6% margin, the tech juggernaut flexed its financial might.
Driving this triumph was its Intelligent Cloud division, where sales skyrocketed 20% to $24.1 billion. Azure cloud infrastructure stood tall with a 34% sales growth, its reach amplified by Azure Arc’s 80% user surge, now serving 39,000 global customers. Backed by data centers in over 60 regions, Microsoft’s footprint in the cloud space continues to expand. The tech giant’s strategic investments in AI and cloud infrastructure across Brazil, Italy, Mexico, and Sweden only deepen its global footprint.
Microsoft delivered a strong quarter, but management’s cautious outlook cooled investor enthusiasm. Azure growth is expected to ease to 31% to 32% range, and Intelligent Cloud revenue may rise 18% to 20% annually. Meanwhile, AI sales are projected to plateau, missing hopes for sequential growth. With increased AI spending also in play, Wall Street’s lofty expectations weighed on the stock after earnings.
Analysts tracking Microsoft predict fiscal 2025 revenue to be around $278.7 billion, with EPS projected to rise 9.6% to $12.93. The company’s bottom line is further projected to surge another 14.3% annually to $14.78 per share.
Recently, UBS analyst Karl Keirstead reaffirmed a “Buy” on Microsoft, raising the price target to $525. Despite Azure's near-term growth challenges tied to capacity delays, Keirstead sees robust potential ahead. With new infrastructure set to go live by mid-2025 and AI demand surging, Azure’s growth is expected to accelerate. Microsoft’s solid position in the high-quality cloud space makes it a strong contender for record highs in 2025.
MSFT stock has a consensus “Strong Buy” rating overall. Among the 40 analysts in coverage, 34 suggest a “Strong Buy,” three advise a “Moderate Buy,” and the remaining three analysts recommend a “Hold.”
The mean price target for MSFT is $508.31, indicating upside potential of 16%. The Street-high target price of $600 implies the stock could rally as much as 37%.
Defensive Stock #2: SAP
SAP SE (SAP), a European tech titan with a market cap of $304.5 billion, has been shaping the world of enterprise software since 1972. This Germany-based global powerhouse provides tailored solutions for businesses across industries, from Enterprise Resource Planning (ERP) to cloud services, data analytics, and customer experience. With its innovations constantly evolving, SAP continues to lead the charge in empowering organizations of all sizes to transform their operations, driving digital change across the globe.
Shares of this enterprise software giant have been on a strong upward trajectory, surging 65% over the past 52 weeks and 27% in the last six months. These gains far outpace the broader S&P 500 Index’s ($SPX) respective gains during these time frames.
SAP's valuation reflects its premium status, trading at 51.16 times earnings - outpacing the IT sector median and surpassing its historical norms. This highlights market confidence in SAP's strong fundamentals, innovation-driven growth, and leadership in enterprise software solutions, making it a standout in the tech arena.
SAP keeps shareholders in focus with a $2.39 annual dividend per share, yielding 0.96%. Beyond payouts, its 5 billion euro buyback program, launched in May 2023, aims to bolster returns through 2025. By September 2024, SAP had already repurchased 2.62 billion euros ($2.73 billion) in shares, signaling its commitment to shareholder value. With dividends and strategic buybacks, this tech titan continues to reward its investors while cementing financial strength.
SAP delivered impressive Q3 earnings results on Oct. 21, surpassing Wall Street's bottom-line expectations, and the stock edged up in the subsequent trading sessions. Total revenue hit €8.5 billion ($8.8 billion), marking a 9.4% year-over-year increase. A 255% jump in cloud backlog revenue to €15.38 billion ($16 billion) powered this.
For fiscal 2024, management projects cloud revenue to hit between €17 billion ($17.7 billion) and €17.3 billion ($18 billion). Non-IFRS operating profit is expected to reach between €7.8 billion ($8.1 billion) and €8 billion ($8.3 billion), with free cash flow forecast between €3.5 billion ($3.6 billion) and €4 billion ($4.2 billion).
Analysts tracking SAP project the company’s profit to dip 19.6% year-over-year in fiscal 2024 to $4.80 per share before soaring a notable 34.8% annually to $6.47 per share in fiscal 2025.
SAP stock has a consensus “Strong Buy” rating overall. Of the 19 analysts covering the stock, 15 advise a “Strong Buy,” one suggests a “Moderate Buy,” and the remaining three analysts recommend a “Hold.”
The average analyst price target of $260.56 indicates potential upside of 3% from the current price levels. The Street-high price target of $300 suggests that SAP stock could rally as much as 18%.
