Unilever plc isn’t the only ‘expensive’ stock I’d consider buying today

Concerned that markets might fall from recent highs? Paul Summers thinks Unilever plc (LON:ULVR) and this equally defensive mid-cap could help to limit the damage.

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How long can this current bull market continue? No one knows. However, if like me you’re beginning to get a little apprehensive at the market’s recent tendency to shrug off practically everything the world throws at it, it’s worth considering whether now might be the time to reduce your exposure to some of your more speculative or cyclical holdings for those that should be able to withstand most economic shocks. Here are just two examples of the latter.

Strong and steady

Boasting a bursting portfolio of brands, FTSE 100 consumer giant Unilever (LSE: ULVR) looks a solid option for investors seeking a bit more security. The psychological pull its labels have over shoppers ensures they won’t suddenly stop buying jars of Marmite, packets of Persil or bottles of Domestos in the event of a market correction. In times of trouble, familiarity and affordable quality bring comfort.

Given the above, it’s not surprising if Unilever continues to look expensive based on conventional metrics. While a price-to-earnings ratio of 22 means the shares will have little interest to value hunters, I think this valuation remains reasonable for the stability that such a company can bring to a portfolio. Although some of its top tier peers may offer more generous payouts, the 3% yield is also attractive. 

But there are plenty of other reasons for considering Unilever. Perhaps the most enticing of these — aside from the company’s long history of generating excellent returns on the money it invests — is the possibility of another bid from US rival Kraft Heinz following its failed $143bn approach earlier this year. 

In the meantime, I think recent weakness in the share price as a result of concerns over a slowing of organic growth in Q3 represents a great opportunity for investors to climb on board.

Buy the dip

Thanks to its fairly predictable earnings, Sutton Coldfield-based funeral services provider Dignity (LSE: DTY) is another company I’d consider buying on the suggestion that markets are looking overvalued. That’s in spite of today’s rather severe response to the latest trading update from the £1.2bn cap.

In line with expectations, revenue climbed 6% to just under £244m over the 39 weeks to 29 September. Underlying operating profit also rose 5% to £79.4m, even though the number of deaths recorded was only 1% higher than over the same period in 2016.

In addition to generating these far-from-awful numbers, Dignity has continued to capitalise on what remains a highly fragmented industry. So far in 2017, the company has acquired 24 funeral locations and one crematorium as well as opening 13 satellite locations. 

So, what’s behind this morning’s 8% share price slump? It’s likely a response to the company continuing to see “increasing price competition and new competitors“, despite strong performance from its pre-arranged and crematorium businesses. As a result, Dignity now expects incremental costs of up to £1m in 2017 in order to maintain standards of service and improve its digital presence. The firm also believes these costs will be a recurring expense in future years.

While rising costs and a more competitive trading environment are unlikely to cheer investors, the fact that full year expectations remain unchanged suggests to me that this reaction is overdone. Although its shares aren’t cheap at 20 times forward earnings, I remain convinced that it could be just the sort of stock to hold in volatile times. 

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 assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. 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.

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