Is Now The Right Time To Buy Unilever plc, Reckitt Benckiser Group Plc & Diageo plc?

Has the weak market provided an opportunity to snap up Unilever plc (LON:ULVR), Reckitt Benckiser Group Plc (LON:RB) and Diageo plc (LON:DGE)?

| 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.

Blue-chip consumer goods companies, such as FTSE 100 giants Unilever (LSE: ULVR) (NYSE: UL.US), Reckitt Benckiser (LSE: RB) and Diageo (LSE: DGE) (NYSE: DEO.US), are highly prized by investors.

Such companies have powerful brands, strong margins and prodigious cash flows. They perform relatively well when economic conditions are challenging. And, with their entrenched positions in developed markets, and increasing expansion into higher growth emerging markets, they have a structural tailwind for long-term growth. As such, investors are happy to pay a premium price.

“Buy on the dips” has been good advice over the years for these quality businesses, whose shares have risen without the great peaks and troughs that characterise cyclical companies.

With the world fretting about a Grexit, the FTSE 100 is down some 8% since hitting an all-time high in April. Unilever, Reckitt and Diageo have performed a little better than the wider market, but have certainly dipped significantly. Unilever and Diageo are both down 7% from their 2015 highs, while Reckitt is off by 6%. So, is now a good time to buy?

Unilever

When I looked at Unilever back in April, the forward price-to-earnings (P/E) ratio was a rich 22.5, with a prospective dividend yield of 3%. By May, the P/E had come down to 21.4 and the yield had edged up to 3.1%. I said at that time I thought Unilever could deliver decent long-term returns, but that, ideally, I’d be looking for an opportunity to buy a bit lower.

Despite the share price now being lower, the valuation is little changed — the P/E is 21.2 and the yield is still at 3.1% — due to some downward revisions in analysts’ earnings and dividend forecasts. As such, I have to reiterate my view on Unilever from May.

Reckitt Benckiser

In April, Reckitt Benckiser’s forward P/E of 25 was even higher than rival Unilever’s, while the yield of 2.1% was lower. By May, Reckitt’s P/E had come down to 23.8. I thought the rating was still a little high, but did note that Reckitt has often surpassed analysts’ earnings forecasts in the past.

Like Unilever, Reckitt has seen some recent downgrades to earnings and dividend forecasts, so the valuation is little changed from May, with the P/E at 23.9 and a yield of 2.2%. Once again, despite the dip in the shares, I have to reiterate my previous view on Reckitt.

Diageo

Global drinks group Diageo is another consumer goods company I looked at in April. At that time Diageo appeared somewhat better value than Unilever and Reckitt, being on a forward P/E of 20, with a yield of 3%. And I was bullish on Diageo’s prospects, when writing in May with the stock on a similar valuation.

Unlike Unilever and Reckitt, whose financial years coincide with the calendar year, Diageo has a June fiscal year end. When I was writing in April and May, my valuations were based on forecast earnings and dividends for June 2015. While Diageo hasn’t released its results for the year yet (they’re due on 30 July), I think it’s now appropriate to look to forecasts for the year to June 2016. The P/E is 19.6, with a yield of 3%, so, while I’m modestly positive about Unilever and Reckitt, I remain more attracted by Diageo’s valuation.

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 considered so you should consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

British Pennies on a Pound Note
Investing Articles

Selling for pennies, are Rolls-Royce shares a value trap?

Rolls-Royce shares have been falling in price. But does that make them good value now? Our writer considers what value…

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

I’d drip-feed £350 monthly into a Stocks and Shares ISA to aim for a million

Reaching millionaire status with only £350 a month may sound ludicrous, but Zaven Boyrazian explains how it can be done…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

I raided the FTSE 100 for 2 cheap income stocks

After their share prices slid, I bought these two cheap FTSE 100 dividend stocks. At these low prices, their cash…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

2 simple steps to earning £400 in monthly passive income

Building a monthly passive income stream doesn't have to be complicated, or require a lot of effort. Zaven Boyrazian explains…

Read more »

Female analyst sat at desk looking at pie charts on paper
Investing Articles

Here’s how I’d invest £10,000 for the next FTSE 100 bull market

Is the FTSE 100 heading for a new bull market? After the past decade we've had, investors could do with…

Read more »

Middle-aged white man wearing glasses, staring into space over the top of his laptop in a coffee shop
Investing Articles

With a spare £500 I’d buy these UK shares

A financial services giant, a FTSE 250 distributor, a FTSE 100 tech stock, and a gold miner are on the…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

Should I buy this defensive FTSE 100 stock for growth and returns?

This Fool takes a closer look at a FTSE 100 stock to see if it could boost his holdings via…

Read more »

Young female analyst working at her desk in the office
Investing Articles

I robbed Mr Market of this cheap FTSE stock!

This FTSE 250 stock has crashed by almost 30% in six months. But I recently bought into this battered business…

Read more »