The Cream Of British Manufacturing

These 5 FTSE stalwarts look set to prosper over the long term.

Last week, in an article discussing the ten-year downward trend in corporate profitability, I described how leading fund manager Neil Woodford has been responding by selling his massive holdings in BP (LSE: BP) and Shell (LSE: RDSB). And how, with the cash that's been freed-up, he's been loading up on manufacturing businesses -- specifically, pharmaceutical companies such as GlaxoSmithKline (LSE: GSK) and AstraZeneca (LSE: AZN).

His logic? Faced with economic headwinds and the need to fund expensive exploration and development programmes, oil giants may be forced to cut their dividends next year, due to falling profitability.

In contrast, Mr. Woodford sees pharmaceutical businesses as not only undervalued, but better able to fund the dividend stream that he strives to achieve. As he puts it: "When I switched out of BP into GlaxoSmithKline, I could do so on the same yield, from a company that was not covering its dividend, to one that covered it two times over with cashflow." In short, it's a logic that it's hard to fault.

I closed the article by promising to pick out five manufacturing companies that looked set to shrug off these downward pressures on corporate profitability -- and likewise deliver a decent income alongside capital appreciation.

Five to go

In short, I went looking for large-cap manufacturers with deep moats, solid cash flows, strong pricing power, and a history of growth.

And the five shares below are FTSE 100 stalwarts that all fit that description. Big, safe businesses with decent brands or franchises, solid finances and equally solid prospects.

Unilever

I make no apologies for kicking the list off with Unilever. With a clutch of global brands and growing overseas sales, the Persil-to-PG Tips giant is a global player in markets as diverse as personal care, home care, nutrition and food. The food brands are especially valuable: Knorr, Wall's, Hellman's, Marmite, Flora, Ben & Jerry's -- these are assets on a global scale.

The company has been on my watch list for a year now. Why haven't I bought it? Partly lack of funds, but mostly price: while cheap, on a P/E of over 16 it hasn't quite been cheap enough, and my hopes of buying on a decent-sized dip just haven't worked out.

Diageo

Diageo is another no-brainer. The world's largest beer, wine and spirits producer, its high-quality brands are sold all over the world, and include names such as Guinness, Johnnie Walker, and Smirnoff.

While Fool writer Alan Oscroft isn't a fan, I prefer the views of Fool writer Tony Luckett, who makes a compelling argument that Diageo offers a combination of strong brands and a history of rising earnings and dividends. Cheap it isn't, but as a long-term hold it's an exceptionally surefire bet.

BAE Systems

BAE Systems manufactures military aircraft, tanks, ships, missiles and munitions. It's a global player, with a hefty American presence, and some juicy long-term contracts.

It's also in the headlines at the moment as it battles corruption charges -- a recent development that Fool writer Stephen Bland hoped would rank the company as a 'crisis play'. Sadly, the hoped-for short-term drop in share price didn't occur, but instead he makes a strong case for the company as a value share.

British American Tobacco

British American Tobacco is another 'sin' share on the list -- and after drinks and munitions, I suppose cigarettes had to be next.

Like Diageo, its shares aren't particularly cheap, but the company has undoubtedly made long-term buy-and-hold investors very rich: good capital appreciation, and a history of throwing off juicy dividends.

Am I worried about smoking bans, advertising restrictions, and the possible outlawing of smoking altogether? No, because I balance that risk alongside comparable risks to other shares -- such as peace breaking out, in the case of BAE Systems -- by holding within a diversified portfolio.

GlaxoSmithKline

Finally, GlaxoSmithKline -- which, of course, was one of the pharmaceutical shares that Neil Woodford has been piling into. I'm a big fan of the stock, and hold it myself.

Yet, like AstraZeneca, the company remains out of favour, resulting in P/E ratios and yields that prompt Neil Woodford to describe them as "the cheapest assets in the stock market today, and rated in a way that ascribes no growth going forward."

Of the two, I think GlaxoSmithKline is the one to plump for, rather than AstraZeneca. Why? Because of its Ribena-to-Macleans consumer business -- a business that's not only a regular earner, but which under chief executive Andrew Whitty has now been given an assured future within the group.

So there we go. Over the economy as a whole, corporate profitability may be declining -- but these five stocks should buck the trend, delivering growth, dividends, and a good night's sleep.

More from Malcolm Wheatley:

• This Retailer's Turned The Corner
• A Practical Grounding in Accounts -- For Free!
• Vanguard's Clever Double-Whammy

Malcolm holds shares in GlaxoSmithKline.