Many investors spent a long time regretting missing out on some incredible bargains in the stock market this time last year. A lot of shares have performed strongly since then. But looking at UK shares today, I notice two companies I hold that are priced almost exactly as they were a year ago.
Unilever: pandemic boost discounted
Over the past year, Unilever (LSE: ULVR) has actually fallen, albeit less than 1%.
Yet the consumer goods giant owns brands such as Domestos and Lifebuoy. I expect to see some long-term demand uplift thanks to an increased hygiene focus caused by the pandemic.
Even without the pandemic effect, the company’s family of brands sold in almost two hundred countries is highly attractive to me. By spreading itself geographically as well as across affordability brackets, the company can insulate itself somewhat from economic downturns. It is also riding on the wave of rising living standards in markets such as south Asia and sub-Saharan Africa. That growing addressable market could help grow revenues and support the UK shares.
Unilever’s strong brand names help give it pricing power. In that way, I think Unilever matches some of the share picking criteria used by Warren Buffett. That helps sustain attractive profit margins, which in turn support dividend payouts. With its yield of 3.7%, Unilever is attractive to me for income.
One of my favourite UK shares
Another share that has hardly moved is British American Tobacco (LSE: BATS). Like Unilever, it trades within 1% of where it sat 12 months ago.
Meanwhile, the business looks in better shape than it did then. It added 3m non-combustible customers last year. Even though combustible revenue fell 4.5%, the company’s pricing power allowed it to increase combustible revenue 2.8%. BAT is a remarkable free cash flow generator. By generating £50m of free cash flow a week last year, it has managed to bring its gearing down somewhat.
The company’s balance sheet still contains more debt than I like. Long-term, the volume decline in combustibles looks set to continue. New revenues from non-combustibles may well not compensate in terms of either volumes or profit.
However, I believe the tobacco industry has some road left ahead of it. BAT’s latest dividend shows the power of such massive free cash flow. These UK shares yield 7.6%. That explains why they are favourites with many dividend hunters including me.
Quality attributes
If these shares are attractive, why hasn’t their price increased? Both have moved up at some points over the past year but essentially I can buy them for the same price now as I could have done 12 months ago. What’s to say they won’t stay flat over the next year too?
The reality is that they could. Or, like any UK shares, they could fall.
But I’m less focussed on the daily moves of these two names. For me, investing in FTSE 100 heavyweights like these offers the hope of long-term rewards. Both have global exposure. Both have strong brand portfolios. Both have pricing power. Both are cash generation machines.
Those attributes of a quality share often come at a high price. I’m glad I can stock up on these UK shares now without having to shell out more than I did a year ago.
