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2 FTSE 100 giants primed to outperform the index in the long term

Image: Unilever. Fair use.

It’s never a sure thing to say any given stock will outperform its index but given the top heavy nature of the FTSE 100, skewed as it is to highly cyclical commodities producers and banks, I’m quite comfortable saying Unilever (LSE: ULVR) is likely to safely beat the index over the long run.

The main reason for this is Unilever’s much lauded defensive nature. Selling everything from Dove soaps to Lipton tea and Surf detergent provides significant downside protection as consumers largely buy these brands throughout the economic cycle.

A further dose of long term protection comes in the form of the company’s truly global reach. This keeps it from relying too much on a single market and also provides very good growth prospects as it moves into developing markets at a rapid clip.

Indeed, developing markets now account for 59% of group sales as of the end of Q1. Although many of the larger developing countries have encountered rough macroeconomic environments in recent quarters due to low commodity prices, Unilever’s sales in these countries are sailing ahead strongly. In Q1 total sales from developing markets grew 6.1% year-on-year due to both price and volume increases, showing Unilever’s vaunted non-cyclical nature and its premium pricing power.

Growth in developing markets more than made up for weak trading in developed countries and helped lead total turnover up 2.4% year-on-year in the quarter on a constant currency basis and 6.1% at actual exchange rates.

There was further good news in the quarter as the company pushed ahead with strategic changes announced after it fended off the £115bn takeover offer from KraftHeinz. These included a 12% increase to dividends and a renewed focus on margins that led management to up its guidance for operating margin improvement during the year to at least 80 basis points.

With its non-cyclical nature, exposure to high growth markets and intention to improve profitability I reckon Unilever is one great share to own for the long term.

A blockbuster in the making?

I’m equally impressed with the long term index-beating potential of GlaxoSmithKline (LSE: GSK). The drug maker’s share price has languished in recent years as investors questioned the diversification strategy of former CEO Andrew Witty but I believe the benefits of his plan are finally beginning to bear fruit.

In Q1 the group’s sales rose 5% year-on-year in constant currency terms as each of the companies major divisions, pharma, vaccines and consumer healthcare, all reported positive sales growth. What was even more impressive is that overall growth was spearheaded by 16% growth from the vaccines division, which was supposed to be a relatively slow grower.

Aside from better-than-expected growth, the vaccines and consumer healthcare division also offer non-cyclical sales that should cushion the feast or famine nature of the pharmaceutical industry. This is already the case as slow growth from the pharma division due to blockbuster drugs rolling off patent is being supplemented by reliable and growing sales from the other two.

And now that new drugs are entering the market the company looks set for a period of rapid growth. New drug sales rose 52% in Q1 and as they win approval in new markets I fully expect them and reliable sales from the other two divisions to propel GSK’s stock above and beyond the FTSE 100.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may 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.