The OECD’s decision to downgrade its global growth forecasts yesterday underlines the massive risks facing stock market investors at present.
The Paris-based body elected to cut its estimates for world GDP expansion in 2017, to 3.2% from 3.3% previously. More alarmingly the OECD’s halved its UK forecasts to 1% and would mark a significant reduction from predicted growth of 1.8% for the current year.
In this environment, selecting stocks with robust earnings records is more important than ever. And in this respect I believe the power of Unilever (LSE: ULVR) and Bunzl (LSE: BNZL) can’t be underestimated.
Bouncing Bunzl
Those scanning Bunzl’s prior earnings performance are greeted with a sea of green, a factor that has enabled the company to lift the dividend for an astonishing 23 years on the bounce.
And the City doesn’t expect the bottom line to flounder any time soon. Indeed, growth of 12% and 6% is pencilled-in for 2016 and 2017 respectively. Consequently Bunzl’s dividends are expected to keep growing, too — 2015’s reward of 38p per share is predicted to advance to 42.4p this year and to 45.2p in 2017.
Value seekers may need some convincing about Bunzl’s merits, however. A forward P/E rating of 22.9 times flies above the FTSE 100 (INDEXFTSE: UKX) average of 15 times. And 2016’s dividend yield of 1.8% falls well short of the blue chip mean of 3.5%.
Still, investors need to look past these heady numbers and towards the long-term picture. Bunzl saw revenues gallop 10% during January-June, to £3.4bn, as demand for its broad range of essential services kept growing.
And Bunzl’s fizzy acquisition drive — facilitated by its enviable cash-generative qualities — should keep driving earnings to the upside. Indeed, the outsourcing giant has made eight acquisitions in the current year alone.
Just 15% of Bunzl’s sales are generated in the UK and Ireland, a figure that should soothe investors concerned about the impact of Brexit in the near term and beyond. Indeed, Bunzl generates almost 60% of group revenues from the robust economies of North America.
A universal winner
Unilever is a similar Footsie favourite whose pan-global presence should deliver explosive earnings growth, in my opinion, and in particular its weighty exposure to emerging markets should be key. The household goods manufacturer sources more than 40% of total revenues from these regions, and underlying sales here leapt 8% during January-June.
Rising affluence levels in these economies are putting Unilever’s premium-priced labels like Dove soap and Ben & Jerry’s ice cream within increasing reach of these new consumers. And a devotion to product innovation, massive marketing drives, and rollouts in new markets make these top-tier brands evergreen cash cows regardless of broader economic bumpiness.
The City shares my love of Unilever’s wares, and expects them to create earnings growth of 4% and 8% this year and next. And this is expected to underpin dividends of 124 and 131 euro cents per share for 2016 and 2017 respectively.
Given its terrific defensive qualities, I reckon investors should be prepared to accept Unilever’s high P/E ratio of 23.4 times and slightly-low dividend yield of 2.9%.
