When the stock market gets the wobbles, as recently, it’s usually a good time to focus in on quality firms.
Good-quality companies with consistent performance and attractive financial characteristics rarely sell cheaply, but periods of market weakness can provide an opportunity to buy the shares a little lower.
Fast-moving consumer goods
Fast-growing brands such as Dove, TRESemmè, Knorr and Hellmann’s power Unilever’s cash-backed growth. The ‘defensive’ qualities of the firm’s business model are attractive, but macro-economic headwinds made forward progress challenging over recent years.
However, the outlook is turning up as Unilever strengthens its innovation pipeline, increases investment in core brands, and extends operations into premium segments and new markets. Although currency and commodity volatility persists, the firm reckons it will see further improvements in volume growth during the rest of 2015.
At a share price of 2783p, Unilever’s dividend yield runs at 3.3% for 2016 and the payout is covered one-and-a-half times by forward earnings.
Fast-growing coffee and hospitality
It’s true that there’s an element of cyclicality in Whitbread’s hospitality and coffee business — quite a large one — but there’s a heck of a lot of growth going on, too! In fact, the firm’s large double-digit yearly earnings increases are mouth-watering.
The company owns the Premier Inn, Costa Coffee, Beefeater, Brewers Fayre, Table Table and Taybarns brands, with Costa and Premier standing out as the greatest drivers of growth. The shares have multi-bagged since 2009 despite looking expensive on conventional price-to-earnings measures the whole time.
At today’s 5075p, share price the dividend yield runs at around 1.8% for 2016 with forward earnings covering the payout about 2.6 times.
Growth in pharmaceuticals
Back in April, Shire released a healthy set of first-quarter results demonstrating that growth remains on track. The firm’s chief executive said the firm exemplifies the characteristics of a leading biotechnology company, delivering strong revenue growth and cash generation, while advancing its innovative pipeline and boosting its future growth profile through its acquisition strategy.
It’s hard to argue with the firm’s success, which has seen the shares power ahead. The man at the top thinks there’s more to come. Shire specialises in behavioural health, gastro intestinal conditions, rare diseases, and regenerative medicine, and there is a healthy development pipeline to keep things rolling along. The firm certainly makes an interesting investment alternative to sector peers GlaxoSmithKline and AstraZeneca.
At a share price of 5230p, Shire’s dividend yield runs at just 0.4%, but forward earnings cover the payout almost 13 times, suggesting the directors see plenty more opportunity for further growth.
Alcoholic consumer brands are attractive. Any consumer brand with repeat-purchase credentials tends to throw off cash, but the addictive nature of alcohol makes firms like Diageo seem even more ‘defensive’. People don’t tend to drop their favourite tipple from their shopping lists no matter how tough the economic times become.
Diageo owns well known brands such as Johnnie Walker, Crown Royal, J&B, Buchanan’s, Windsor, Bushmills, Smirnoff, Ketel One Vodka, Ciroc, Captain Morgan, Baileys, Tanqueray and Guinness. Last year Diageo earned about 37% of its operating profit from emerging markets such as Africa, Eastern Europe, Turkey, Latin America, the Caribbean, and the Asia Pacific, with the rest coming from Europe and North America.
Today’s 1874p share price sees the dividend yielding about 3.1% for 2016 with forward earnings covering the payout around 1.7 times.
Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended GSK. 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.