The FTSE 100 has staged a bit of a recovery so far in October, but at 6,350 it’s still more than 10% down from its April high of 7,100.
The oil price has moved back above $50 a barrel, while a bid of just over £42 a share for Footsie beer giant SABMiller from the even-more-gigantic Budweiser owner Anheuser Busch InBev has injected a bit of excitement into the market.
The bid for SABMiller is a reminder of just how highly trade buyers rate the rare and valuable brands owned by the world’s top consumer goods companies. The equity markets may rate these companies highly — they tend to trade on a price-to-earnings (P/E) ratio well above the market average — but trade buyers typically rate them at a higher premium still.
Which brings me to another two FTSE 100 companies with outstanding brands — household goods goliath Unilever (LSE: ULVR) and hard liquor leviathan Diageo (LSE: DGE). Now, I’m not saying a bid is coming for either of these companies. What I am saying is that the true long-term value in such businesses is often underestimated by the market.
Here are three reasons why investors might want to consider piling into Unilever and Diageo right now.
Buy on the dips
You don’t tend to get wild swings in the share prices of companies like Unilever and Diageo. When a market correction comes along, such as the one we’re in now, the biggest fallers grab the attention. Nevertheless, buying the likes of Unilever and Diageo at such times has been a good strategy over the years for long-term investors. “Buy on the dips”, as the saying goes.
At £27.50, Unilever’s shares are 9% below their 52-week high, while Diageo’s, at around £18, are 10% off. The companies trade on a similar earnings rating: Unilever’s 12-month forecast P/E is 19.9 and Diageo’s is 19.7.
For comparison, SABMiller’s P/E is 23.9 at its current share price, and a whopping 27.9 at the AB InBev offer price.
3.3% and rising
As all good Fools know, the compounding power of reinvesting dividends is never to be underestimated. Unilever and Diageo both offer a 12-month forward yield of 3.3%. Again, for comparison, SABMiller offers a prospective 2.1% (or 1.9% at the AB InBev offer price).
Sure, the yields of Unilever and Diageo are still a long way from being the highest in the market, but these two companies are among the most certain to deliver dividends. Both have excellent long-term records of growing their payouts, and analysts see this continuing with mid-single-digit annual increases for the foreseeable future.
A 3.3% initial yield (in the current low interest rate environment) and the prospect of annual mid-single-digit growth (in the current low inflation environment) offer an attractive compounding combination for reinvesting dividends.
Defence of the realm
Finally, Unilever and Diageo share several characteristics that underpin their prospects for years to come. Economies of scale, geographical diversification and the power of their brands provide a powerful armoury for defending their realms — and, indeed, increasing their influence.
The nature of their products also makes Unilever and Diageo hugely appealing businesses. Their products are bought over and over again — day-in, day-out; week-in, week out; rain or shine. Such predictability makes for relatively predictable cash flows, and, ultimately, relatively predictable returns for investors.