Why I’d buy Unilever plc and Diageo plc to hold for ever

If Unilever plc (LON:ULVR) and Diageo plc (LON:DGE) can combine long-term growth with progressive dividends, why buy anything else?

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Unilever sign

Image: Unilever. Fair use.

What would you say about investing in a company that sells a range of goods that people just can’t live without. Or two different categories of things people buy every day. How about two such companies?

It’s pretty much what I’m thinking when I consider Unilever (LSE: ULVR) and Diageo (LSE: DGE) as investments. 

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The former sells a wide range of food and household products — in fact, you’d be hard pressed to do a week’s shopping and not buy any Unilever items.

And the latter owns a whole pile of the world’s best-loved booze brands — so if you like a drop of the hard stuff, you’ve probably partaken of Diageo’s bounty more than once.

The nature of their products means they’ll never go out of fashion, and the breadth of ubiquitous brand names erects a formidable barrier to entry for any other companies trying to muscle in on their established markets.

What’s more, the two companies have been performing well and rewarding their shareholders handsomely for decades.

Household names

You’ll surely be familiar with a lot of Unilever brands. Among those with annual sales of a billion euros per year or more you’ll find Axe/Lynx, Dove, Surf and Sunsilk for taking care of the outside of your body, and Flora, Hellmann’s, Knorr and Lipton for helping satisfy the inside.

On the financial performance front, earnings have been rising steadily for years, and the dividend has been growing alongside. Unilever’s isn’t the biggest in the FTSE 100 at around 3%-4%, but it’s steadily progressive and generally keeping ahead of inflation.

The share price has gained 85% in the past five years too, and if you’d bought some way back in 1988, you’d now be sitting on a cool 14-bagger. And back to that dividend, if you had bought shares five years ago, you’d have had an effective yield last year of around 7.5%.

Forecasts look good too, and a Q3 update last week reported underlying sales growth of 2.8% for the nine months, with a nice global spread of growth — underlying Q3 sales in emerging markets rose by 6.3%.

The good stuff

What’s on the shelves at your local Bargain Booze that comes from Diageo? How about Captain Morgan, Bell’s, Gordon’s, Smirnoff, Guinness, and that breakfast of champions, Johnnie Walker?

There are many more brands too, and Diageo is the world’s biggest whisky producer with Talisker, Lagavulin, Cragganmore and Knockando among its array of malts.

And the shares? A slightly more modest 45% over five years, and a five-bagger since 1996, but that still beats the pants off the FTSE 100. 

Dividends tend to be a bit behind Unilever’s at a shade under 3%, but we’re still looking at an inflation-proof progressive policy to maintain the value of your annual income. Earnings per share have actually been just about flat over the past five years, but there’s been sufficient cover to keep the dividend growing — and there’s an 8% earnings growth forecast for this year.

A trading update in September told us to expect “mid-single-digit top line growth” over the years to June 2019.

And you know what? I’ve looked at both of these many times over the years, but I have never actually bought any. Every time I’ve been ready to make an investment, I’ve ended up putting my money somewhere else. What an eejit.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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.

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