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Why Unilever plc And Reckitt Benckiser Group Plc Are Getting Too Expensive

Consumer-goods companies like Unilever (LSE: UU)(NYSE: UL.US) and Reckitt Benckiser (LSE: RR)(NASDAQOTH: RBGLY.US) are popular safety stocks when other investments are starting to look a bit risky, but one downside of that is they can quickly get quite scarily priced by usual metrics.

Look at Unilever, whose shares have soared 14% since early January to 2,939p. That takes in a 52-week high on 28 January of 2,993p, and provides shareholders with a 21% gain over the past 12 months.

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But look at the valuation it has left the shares on now — based on forecasts for the year ending December 2015, we’re looking at a P/E pf 21.6, which is about 50% ahead of the FTSE 100‘s long-term average of around 14. And for that, you’re only likely to get a decidedly average dividend yield of a bit over 3%.

Safe but pricey

Sure, Unilever produces a range of goods that are not going out of fashion, including Sunsilk, Dove, Flora and Hellmann’s — all brands with sales of more than €1bn a year. So it’s safe and not going to go bust any time soon, but a 50% premium over the FTSE 100 looks too steep to me.

Things are similar at Reckitt Benckiser, which has such staples as Dettol, Lemsip, Air Wick and Scholl under its umbrella. Again, they’re brands that are not going to disappear from supermarket shelves, but again the market might be paying too much for the safety of the shares.

In this case, we see a forward P/E for December 2015 of 23, even higher than Unilever’s. And Reckitt Benckiser’s predicted dividend yield, at 2.3%, is significantly below both Unilever and the FTSE average.

Reckitt Benckiser shares have done even better than Unilever’s over the past 12 months, with a 26% gain to today’s 5,675p — and the 5,690p price they briefly touched on today is another 52-week high.

Cheap oil

The slump in the price of oil, which has been stuck below $50 a barrel for a couple of weeks and doesn’t look like picking up for a long time yet, is surely at least part of the reason for the current flight to safety. But aren’t there better bargains out there?

I reckon the utilities companies are looking better value these days, as lower wholesale energy prices are helping take a lot of pressure off their profit margins. At 291p, for example, Centrica shares can he had on a relatively modest 2015 forward P/E of 14 — and at the same time, the pundits are expecting dividend yields of more than 6%!

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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