Investors can be forgiven for feeling nervous at the moment. Concerns over global growth and the EU referendum are at the forefront of shareholders minds. In uncertain times, the more predictable a businesses is, the greater the degree of comfort it offers.
Today, I’ll be looking at two consumer goods giants and asking whether their share prices could not only withstand periods of volatility but actually double in only a few years.
Reassuringly expensive
Unilever (LSE:ULVR) and Reckitt Benckiser (LSE:RB) are both multinational companies with enviable portfolios of familiar brands that may already be in your home. Marmite, Lynx, Persil, Dove, Flora? Unilever owns them all. Durex, Dettol, Vanish and Strepsils? These are just four of Reckitt Benckiser’s famous names.
Collectively, these sticky brands generate huge amounts of cash for their respective companies, which ultimately boosts their share prices. This time last year, shares in Unilever traded at 2,656p. Today, they’re valued at 3,245p. That’s a rise of 22%. Reckitt’s share price has performed just as well, rising 22% from 5,703p to 6,946p. Look again at the title of this article. I don’t think it’s overly optimistic.
This feat hasn’t escaped the market’s attention, of course. Unilever’s shares now trade on a forecast price-to-earnings (P/E) ratio of 21. Reckitt’s P/E is even greater at 23.
But if you baulk at how expensive these companies are, consider this: these superb share price gains have occurred in 12 months that have seen an interest rate hike in the USA, two large market wobbles (August and January), the Greek debt crisis, terrorist attacks in Paris and Brussels and an assortment of other doubts and concerns have hit the headlines. Stability is one thing but out-performance of this kind during dark periods is the sign of two great companies. And great companies tend to receive high valuations.
Even if these shares are expensive, there are other attractions. The yields, while not outstanding, look safe and secure. Income investors considering distressed oil giants or miners with unrealistic payouts should ponder this for a while. Wouldn’t it be nice not to worry about whether you’ll receive that next dividend? At just under 3%, Unilever’s yield is well covered by earnings. Reckitt Benckiser’s yield may be lower at just over 2% but has even better cover than its FTSE100 peer. Receive, reinvest, repeat.
Can elephants gallop after all?
The late, great investor Jim Slater believed that the best gains could be made from under-researched small-cap stocks. In his view, the vast majority of FTSE 100 giants plod along, providing predictable, adequate, if unexciting returns for investors. I think these companies could be exceptions to his rule. My reason for this rests on both companies’ emerging market presence.
As much as 58% of Unilever’s earnings come from these economies. Its most recent trading statement indicated sales had grown by 8% in the last three months, despite challenging conditions. In Reckitt’s April Q1 results, revenue from emerging markets was up 10% and accounted for 31% of total revenue across the group. All this during a time in which some developing countries, such as Brazil and Russia, have experienced and continue to experience significant economic headwinds. Just think how earnings at both companies could explode if these and others were to recapture their spark and stage a significant and sustained recovery?
