At first glance, Unilever (LSE: ULVR) Reckitt Benckiser (LSE: RB) and PZ Cussons (LSE: PZC) all look pricey.
After an impressive run over the past 12 months, these three companies now all trade at a premium to the wider market.
For example, Unilever currently trades at a forward P/E of 21. Reckitt currently trades at a forward P/E of 23.6 and PZ Cussons trades at a forward P/E of 19.7. Meanwhile, the FTSE 100 trades at an average P/E of 14.7.
But despite their premium valuation, Unilever, Reckitt and PZ Cussons are still worth buying at present levels.
High quality
It’s always worth paying a premium for quality. And these three companies are all high-quality picks.
You see, Reckitt, Unilever and PZ Cussons all produce a selection of essential everyday household items, the sales of which are easy to predict.
What’s more, these three companies all manufacture a range of branded products with a strong customer loyalty, giving them pricing power. Simply put, pricing power allows a firm to raise prices without having to worry about a drop in demand.
All in all, a range of defensive every-day products, coupled with the ability to set prices and maintain consistently high-profit margins are two factors that enable Reckitt, Unilever and PZ Cussons to stand head and shoulders above the wider market.
And the success of these businesses is easy to see in their lofty returns on capital employed.
Return on capital
Return on capital employed, or ROCE is a telling and straightforward gauge for comparing the relative profitability levels of companies. The ratio measures how much money is coming out of a business, relative to how much is going in.
The higher this ratio is the better. However, according to my figures, only one-third of the world’s 8,000 largest companies managed to achieve an ROCE of greater than 10% last year.
Reckitt, Unilever and PZ Cussons all generate a ROCE that puts the rest of the market to shame. Over the past decade Unilever’s average annual ROCE has been in the region of 22%. Reckitt’s has come closer to 30% per annum.
PZ Cussons is the runt of the group and has only been able to generate an average ROCE of 15% during the past six years. Still, this figure is higher than the majority of the wider market.
Yielding results
A high, recurring return on capital has helped Reckitt, Unilever and PZ Cussons all outperform over the past decade.
Indeed, over the past ten years, excluding dividends, Unilever’s shares have gained 131%, Reckitt has gained 229% and PZ Cussons has gained 153%. The FTSE 100 only returned 33% over the same period.
