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Why Unilever plc And Banco Santander SA Are The Perfect Stocks For A Starter Portfolio

Picking stocks can be a tough business and most investors just don’t have the time to do the research required.

However, you can’t go wrong with Unilever (LSE: ULVR) and Santander (LSE: BNC). These two large caps have all the qualities of great companies, and they own a number of globally recognised brands. 

What’s more, due to their size, diversification and strong balance sheets, neither company is going to go out of business any time soon — reducing the risk for investors. 

Buy and hold

Unilever is one of the best companies listed in London today. The group produces over 400 brands of products, 13 of which have sales in excess of a billion euros per annum.

These products are sold around the world and used by two billion people every day. The company isn’t dependent upon any one single market. 

As a result, Unilever has been able to grow net income at a steady rate of 3.6% per annum on average for the past decade. 

Now, this growth rate is nothing to get excited about. However, one of the key principles of investing is to reduce the risk of permanent capital loss. In other words, you need to be sure that the stocks you buy, won’t go to zero. 

And with Unilever’s strong international presence, there’s almost no risk of the company going out of business anytime soon. 

Cash rich 

As Unilever’s sales have grown steadily over the past decade, so has the company’s cash generation. In particular, Unilever has generated, on average, €5bn per annum in free cash flow during the past decade. 

Around 85% of net income is being converted into free cash flow every year. Few companies can boast level of cash generation. 

A large chunk of this cash is returned to investors, but not all of it. Of the €30bn in cash generated from operations over the past five years, only €14bn, or around 45% has been returned to investors. The rest has been reinvested back into the business to boost growth. 

Unilever currently supports a dividend yield of 3%, and the payout is covered twice by earnings per share, leaving plenty of room growth. 

Emerging market growth 

Unilever is a cash rich company that looks after its shareholders making it the perfect income play. On the other hand, Santander is a growth play.

After a management overhaul earlier this year, the bank is now firmly on a growth footing. The bank is looking to boost its lending to customers, grow its wealth management arm, and increase the number of depositors using its service.  

Specifically, Santander wants to increase the number of loans it makes to customers by around €35bn per year. Further, management is looking to increase the number of retail customers that do the majority of their banking with Santander by 40% over the next three years. It’s believed that this initiative alone could generate €2bn to €3bn of additional income for Santander. 

Rapid growth, low risk

City analysts believe that management’s growth drive will help Santander’s earnings per share expand by 12% during 2015 and 2016. Not bad for a company that’s currently trading at a forward P/E of 12.7.

But what about risk? Well, Santander was one of the few global banks not to receive a bail-out during the financial crisis and ever since, the group has been working to strengthen its capital position. Now, Santander, is one of the best-capitalised banks out there. 

Strong management 

Santander’s growth is being driven by a strong management team. 

In many cases, investors underestimate the importance of a strong management team. But here at the Motley Fool we love championing CEOs and investors who go against the grain of the City institutions and fund managers.

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Rupert Hargreaves has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.