Is Now The Right Time To Buy Unilever plc, Reckitt Benckiser Group Plc & Diageo plc?

Has the weak market provided an opportunity to snap up Unilever plc (LON:ULVR), Reckitt Benckiser Group Plc (LON:RB) and Diageo plc (LON:DGE)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Blue-chip consumer goods companies, such as FTSE 100 giants Unilever (LSE: ULVR) (NYSE: UL.US), Reckitt Benckiser (LSE: RB) and Diageo (LSE: DGE) (NYSE: DEO.US), are highly prized by investors.

Such companies have powerful brands, strong margins and prodigious cash flows. They perform relatively well when economic conditions are challenging. And, with their entrenched positions in developed markets, and increasing expansion into higher growth emerging markets, they have a structural tailwind for long-term growth. As such, investors are happy to pay a premium price.

“Buy on the dips” has been good advice over the years for these quality businesses, whose shares have risen without the great peaks and troughs that characterise cyclical companies.

With the world fretting about a Grexit, the FTSE 100 is down some 8% since hitting an all-time high in April. Unilever, Reckitt and Diageo have performed a little better than the wider market, but have certainly dipped significantly. Unilever and Diageo are both down 7% from their 2015 highs, while Reckitt is off by 6%. So, is now a good time to buy?

Unilever

When I looked at Unilever back in April, the forward price-to-earnings (P/E) ratio was a rich 22.5, with a prospective dividend yield of 3%. By May, the P/E had come down to 21.4 and the yield had edged up to 3.1%. I said at that time I thought Unilever could deliver decent long-term returns, but that, ideally, I’d be looking for an opportunity to buy a bit lower.

Despite the share price now being lower, the valuation is little changed — the P/E is 21.2 and the yield is still at 3.1% — due to some downward revisions in analysts’ earnings and dividend forecasts. As such, I have to reiterate my view on Unilever from May.

Reckitt Benckiser

In April, Reckitt Benckiser’s forward P/E of 25 was even higher than rival Unilever’s, while the yield of 2.1% was lower. By May, Reckitt’s P/E had come down to 23.8. I thought the rating was still a little high, but did note that Reckitt has often surpassed analysts’ earnings forecasts in the past.

Like Unilever, Reckitt has seen some recent downgrades to earnings and dividend forecasts, so the valuation is little changed from May, with the P/E at 23.9 and a yield of 2.2%. Once again, despite the dip in the shares, I have to reiterate my previous view on Reckitt.

Diageo

Global drinks group Diageo is another consumer goods company I looked at in April. At that time Diageo appeared somewhat better value than Unilever and Reckitt, being on a forward P/E of 20, with a yield of 3%. And I was bullish on Diageo’s prospects, when writing in May with the stock on a similar valuation.

Unlike Unilever and Reckitt, whose financial years coincide with the calendar year, Diageo has a June fiscal year end. When I was writing in April and May, my valuations were based on forecast earnings and dividends for June 2015. While Diageo hasn’t released its results for the year yet (they’re due on 30 July), I think it’s now appropriate to look to forecasts for the year to June 2016. The P/E is 19.6, with a yield of 3%, so, while I’m modestly positive about Unilever and Reckitt, I remain more attracted by Diageo’s valuation.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »