Unilever (LSE: ULVR), Reckitt Benckiser (LSE: RB) and PZ Cussons (LSE: PZC) are three of the market’s most defensive consumer goods companies. However, even these consumer champions have not been able to escape the recent market volatility.
Indeed, over the past six months Unilever’s share price has fallen by 9.3% and PZ Cussons’ shares have lost 16.7%. Reckitt’s shares have fared slightly better — over the past six months, its shares have actually gained 1.8%. But to put that in context, back at the beginning of August Reckitt’s share price was up by around 20% for the year.
Still, for long-term investors, these declines present an excellent opportunity to top up, or to build new holdings of these consumer goods champions, and there are three key reasons why Unilever, Reckitt and PZ Cussons make great additions to any portfolio.
Defensive plays
Firstly, all three companies are defensive plays as they produce a range of everyday essential household items, the sales of which are unlikely to collapse overnight.
For example, between 2006 and 2011, Unilever’s, Reckitt’s and PZ Cussons’s revenues expanded by 17%, 94% and 52% respectively. As the world tried to navigate its way through a global financial crisis, all three companies continued to report rapid sales growth.
And shareholders reaped the benefits of this growth as all three companies have significant “pricing power”, which allows them to set the prices of goods sold. This enables them to maintain steady profit margins even during periods of economic stress. Further, pricing power translates into high returns on invested capital — a straightforward gauge for comparing the relative profitability levels of companies.
Return on capital
Over the long term, share prices tend to track returns on capital. If a business earns 6% on capital over ten years, and you hold it for ten years, your return will be around 6% per annum. Similarly, if a business earns 18% on capital per annum, and it manages to maintain this performance, you’re highly likely to outperform the market over the long-term.
So, the second key reason Unilever, Reckitt and PZ Cussons would make a great addition to any portfolio is their return on capital employed, or ROCE for short. Over the past ten years, Unilever’s average annual ROCE has been in the region of 22%. Reckitt’s ten-year average ROCE has come closer to 30% per annum and finally, PZ Cussons’ ten-year average ROCE is 12%.
Income champions
The third, and final reason PZ Cussons, Reckitt and Unilever would make a great addition to any portfolio is their dividend policy. Specifically, the companies return the majority of their profits to investors via dividends, great news for dividend investors.
At present, PZ Cussons’s shares support a dividend yield of 2.9%, with the payout covered 2.2 times by earnings per share (EPS). Unilever supports a dividend yield 3.2% and the payout is covered 2.6% times by EPS. Finally, Reckitt yields 2.0%, covered 1.7 times by EPS.
