We examine Unilever plc (LON:ULVR) and United Utilities Group PLC (LON:UU), and catch up with Rio Tinto plc (LON:RIO).
This article is the latest in a series that aims to help novice investors with the stock market. To enjoy past articles in the series, please visit our full archive.
It's about a month since we last had a look at the companies on our watchlist, so it's about time we checked to see how they're going. I've also added a new company to the list, and there's a bit of news from the portfolio itself that we should look at.
But firstly, here's the current state of the watchlist:
|Company||Market cap||Price||Forward P/E||Forward dividend|
Unilever (LSE: ULVR) is a company that I've always liked, as it's solid and dependable, and a decent defensive share during downturns -- it makes the kind of household essentials that people just don't cut back on. It's mainly a dividend share, though the price has put on around 20% since the start of June.
But that price rise is the reason I'm unlikely to add it to the portfolio, as it has taken the price-to-earnings (P/E) ratio -- based on 2012 estimates -- to 18.8, and that just makes it a bit too expensive for me. After that rise, I can see the price remaining fairly flat over the next year or two, so buying it now would be just for the dividend. And with 3.3% forecast, there are more attractive dividends out there. So for me, Unilever just isn't a 'buy' right now, but we can keep watching it.
A better dividend
A dividend payer that I think is more attractive is United Utilities (LSE: UU). Like the rest of the utilities companies, what we're looking at here is a pure cash-cow, dividend investment, suitable to be kept for decades. And that forecast yield of 4.9% does look tasty. However, having United Utilities in the watchlist is really a placeholder for utilities companies in general, and if we buy one we will need to consider the alternatives. SSE (LSE: SSE), for example, offers a forecast 5.8% dividend yield for the year to March 2013, rising to over 6% for the next two years. It's on a lower P/E than United, too, of around 12.6 compared to 17.6. But at the same time, United has double-digit earnings growth forecast, versus SSE's 0% for this year, rising to 3% next.
Even though the prices have risen over the past year, I'm really starting to think that a utility company has to be a 'buy' for a long term portfolio like ours, and one of them may well take up one of our last two slots.
I've added GKN (LSE: GKN) to the list after taking a look at the company's strong share price growth of late (and thinking I wish I'd seen the potential earlier). The price is up around 20% since a positive update in October, expectations for the full year to December 2012 are strong, and analysts currently have 10% earnings growth tentatively pencilled in for each of the next two years.
Even after the recent price surge, the shares are still only on a P/E of 10, and there are thrice-covered dividends forecast with a yield of over 3%. The engineering sector is on a bit of a recovery as well, so on first inspection, GKN is looking like a 'buy'. Could we have a utility and an engineer making up our last two purchases? It's possible.
And some news
I wasn't happy to wake up on Thursday to the news that portfolio member Rio Tinto (LSE: RIO) had warned of a $14 billion (£8.8 billion) write-down relating to its aluminium business and its coal operations in Mozambique, and that chief executive Tom Albanese had been given the boot. With dread, I awaited the market's opening.
But what happened was surprising. The price opened more than 4% down, but immediately started to recover, and ended the day just 19.5p (0.5%) down on 3,439p. And on Friday the price rose further, ending the week 1% up on 3,502p. This investment world really is a strange one.
Rio Tinto remains a strong 'buy' for me.
Finally, a big part of the Beginner’s Portfolio is based on a strategy of buying strong dividend-paying shares, and Neil Woodford is an acknowledged expert on it. The free Motley Fool report “8 Shares Held By Britain's Super Investor” takes a look at some of his major holdings, and I strongly recommend learning from successful investors as part of the Beginners' process. Click here to get your free copy, while it’s still available.
The free report "10 Steps To Making A Million In The Market" is also one I'd urge beginners to have a read of, because it's inspirational and it really does make a convincing case for the great potential of long-term investing in quality companies.
> Alan does not own any shares mentioned in this article. The Motley Fool has recommended shares in Unilever.