Why Reckitt Benckiser Group Plc Beats Unilever Plc And Associated British Foods Plc

Reckitt Benckister Group plc (LON:RB) triumphs over Unilever plc (LON:ULVR) and Associated British Foods plc (LON:ABF) in the consumer sector battle.

| 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.

Last time I took a look at one of the FTSE 1oo sectors, I examined the oil & gas business, and I found it impossible to choose between Royal Dutch Shell and BP.

Today I’m turning to something a little different, and I’m comparing three companies that are technically in two different sectors. They are Unilever (LSE: ULVR) (NYSE: UL.US), Reckitt Benckiser Group (LSE: RB) (NASDAQOTH: RBGLY.US) and Associated British Foods (LSE: ABF), and the reason I’m pitting them against each other is that all three essentially produce consumer goods — and I think they make a good barometer for consumer demand.

 Here’s an overview of some fundamentals:

Company Unilever Reckitt Benckiser Associated British Foods
Market cap £34.3bn £32.6bn £15.3bn
Recent price 2,620p 4,570p 1,933p
Share price growth 16% 28% 50%
Historic EPS growth 10% 7% 18%
Forward EPS growth -2% 0% 11%
Historic P/E 17.2 14.5 14.6
Forward P/E 19.2 17.0 20.0
Historic Dividend 3.5% 3.5% 2.2%
Forward Dividend 3.4% 3.0% 1.6%
Forward Cover 1.5x 1.9x 3.1x

Share price growth is over the past 12 months, historic figures are for the last reported full year, forward figures are for the next forecasts.

First impressions

I’ve been watching all three companies for some time, as I have Unilever in the Fool’s Beginners’ Portfolio watchlist, and they’ve all been looking a bit pricey to me. They’re reasonably defensive shares, so I’m not surprised they’ve been holding their own during the past few years — but they’ve all been soaring since late 2012. But let’s take a look at each:

Unilever

I’ve always liked Unilever as long term investment, and with the exception of a cut in 2009, it has been steadily raising its dividend. Even the 2009 dip was quickly overcome, with the next year’s payment rising to exceed 2008’s. The yield is not great, but at around 3.5% it isn’t bad either. Forecasts are somewhat middling for this year and next, with little real change in overall earnings per share (EPS) expected, but the dividend is expected to carry on creeping up and it should be adequately covered.

But that share price! Granted, it peaked at 2,885p back in May (which gave us a forward P/E of 21) and has fallen 9% since then to 2,620p. But I can’t help thinking we’re in a price-correction phase right now and the share price is likely to disappoint over the next year or two.

Reckitt Benckiser

With hindsight, Reckitt Benckiser would have been a great buy a year ago, but even after a strong share price rise, I think the company edges ahead of Unilever in a number of ways. Firstly, even the crunch year of 2009 didn’t affect its dividend, and we’ve been seeing uninterrupted rises — last year we had a yield of 3.5%. Earnings growth has been steady too, though forecasts do suggest flat EPS this year and a modest 3% rise for 2014. Dividend growth also looks set to slow a bit this year, with a 3% yield predicted.

But, Reckitt Benckiser also scores in that its dividend is significantly better covered that Unilever’s, and the company could afford to pay a similar 3.4% forward yield to Unilever’s while still keep cover above 1.7x. The slightly lower P/E multiple tempts me more too.

Associated British Foods

This brings me to perhaps the must unusual of the three, Associated British Foods, which mostly focuses on grocery, agriculture, sugar and such foodie things. But it also owns retail clothing chain Primark, and it’s Primark that has been driving its recent upbeat trading.

Associated British Foods has been exhibiting growing earnings and dividends just like the other two, and it has the strongest EPS forecasts of the three here — 11% this year, 9% next. But against that, we do have the highest forward P/E by a whisker. And though the dividend is rising and is the best covered of the three, it looks set to provide a yield of only 1.6% — doubling that to the FTSE average of around 3.2 would bring the cover down to Unilever’s 1.5x.

The winner

I have to confess I’d have difficulty plonking down my cash for any of these three at today’s prices, even though I think they’re all great long-term businesses. But if I had to choose one, I’d plump for Reckitt Benckiser, on what I think are slightly better fundamentals — and it also has lower debt than Unilever, though neither carries too much.

Finally, if you’re looking for investments that should take you all the way to a comfortable retirement, I recommend the Fool’s special new report detailing five blue-chip shares. They’ll be familiar names to many, and they’ve already provided investors with decades of profits.

But the report will only be available for a limited period, so click here to get your hands on these great ideas — they could set you on the road to long-term riches.

> Alan does not own any shares mentioned in this article. The Motley Fool has recommended shares in Unilever.

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.

More on Investing Articles

Investing Articles

This FTSE 250 stock is up 30% in July! Should I buy it now?

This FTSE 250 technology stock has seen its share price rise by 30% already in July. Roland Head asks if…

Read more »

Investing Articles

Forget Rolls-Royce shares! I’d rather buy this FTSE stock

Despite Rolls-Royce (LSE: RR.) shares faring well in recent times, our writer explains why she would prefer to buy this…

Read more »

Investing Articles

Rio Tinto’s share price slumps following production update! Time to buy in?

Poor production news has pulled Rio Tinto's share price sharply lower again. Is the FTSE 100 mining stock now too…

Read more »

Investing Articles

Could investing £20,000 in a Stocks and Shares ISA make me a millionaire?

Ben McPoland takes a look at how many years it might take to grow a £20k Stocks and Shares ISA…

Read more »

Investing Articles

Are these 2 dividend stocks no-brainer buys for a winning portfolio?

Sumayya Mansoor takes a closer look at these dividend stocks to see if they can help her build wealth through…

Read more »

Investing Articles

Does a 35% price drop make Trufin one of the best AIM shares to buy now?

The Trufin share price has just fallen by over a third after Lloyds terminated a contract. Does this make it…

Read more »

Investing Articles

4% yield and 45% growth in 12 months forecasted! I love this passive income investment

Our author says this passive income investment is significantly undervalued with a generous dividend yield. It's at the top of…

Read more »

Woman sneaker shoe and Arrow on street with copy space background
Investing Articles

£5,000 in savings? Here’s how I’d start investing in FTSE shares today

Based on his own experiences, Paul Summers reflects on the steps he'd take if he wanted to begin investing in…

Read more »