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The Beginners’ Portfolio: What If We’d Bought Unilever plc Or Reckitt Benckiser Group Plc?

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The Beginners’ Portfolio is a virtual portfolio, which is run as if based on real money with all costs, spreads and dividends accounted for.

When we look for things to invest in, many people think first about companies in the news — a bank’s latest scandal, Apple‘s latest sales iPad sales, and so on. But not enough of us take the time to look at what we’re dunking our biscuits in or washing our hair with.

Cornerstones

unileverIt’s these products, made and sold by the likes of Unilever (LSE: ULVR) (NYSE: UL.US) and Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGLY.US), that can make up a strong backbone for a portfolio. That’s why I’ve been watching Unilever since the early days of the portfolio, though I haven’t really had a look since January when I thought the shares were overpriced.

Today I want to catch up on how things would have gone had we taken the plunge and added one of these two consumer-products giants to the portfolio a year ago.

Firstly, here’s how the share prices would have gone…

Company Price, 24 Oct 2012 Price, 24 Oct 2013 Change P/E 2012 P/E 2013
Unilever 2,265p 2,507p +10.7% 18.1 18.8
Reckitt 3,768p 4,785p +27% 15.1 17.9

(2012 P/E values are based on actual 2012 EPS and the 24 October price, 2013 figures use current consensus forecasts)

Reckitt Benckiser shares, we should note, climbed strongly this week in response to Tuesday’s third-quarter results, which showed a 5% net revenue rise.

Even though I’ve balked at what I’ve seen as too high a valuation for Unilever each time I’ve looked, we’d still have made a gain of 10.7% in the share price over the past year. And we’d have had 86p in dividends to add, giving us a total of 2,593p per share today for an overall gain of 14.5%.

For Reckitt Benckiser, we’d be sitting on a share price gain of 27%, with dividends of 138p making that up to 30.7%.

Valuation now

So either way, we wouldn’t have done badly at all — and we would have made a very handsome profit from Reckitt Benckiser. But P/E valuations have risen over the past year too, and are now significantly ahead of the FTSE long-term average of around 14.

Here’s how that looks from a historical perspective…

Year Unilever P/E Unilever dividend Reckitt P/E Reckitt dividend
2008 12.9 4.2% 16.0 3.1%
2009 19.3 1.8% 16.9 3.0%
2010 16.4 3.6% 15.4 3.3%
2011 17.4 3.7% 12.7 3.9%
2012 17.2 3.5% 14.5 3.5%
2013 (f) 18.8 3.6% 17.9 3.1%
2014 (f) 17.7 3.8% 17.5 3.2%

Both companies are trading above their longer-term valuations. And while those forecast dividends are pretty much in line with recent records and look decent enough for a couple of safe companies, there are significantly better ones to be had out there.

Still not buying

I can’t help thinking that a lot of safe shares like these two have been boosted by today’s low-interest environment, with institutional investors seeking reliable income in other ways — and recent economic bullishness has moved more cash back into shares, giving them a further boost.

We clearly would have gained by choosing Unilever or Reckitt Benckiser a year ago, but I still see them both as too highly valued right now and I’m still going to pass on them — and maybe I’ll look back in another year’s time to see what further gains I’ll have missed.

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> Alan does not own any shares mentioned in this article. The Motley Fool has recommended shares in Unilever.

See all articles by Alan Oscroft