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As Valuations Surge, Should You Avoid British American Tobacco plc, Imperial Tobacco Group PLC, Unilever plc & SABMiller plc?

British American Tobacco (LSE: BATS), Imperial Tobacco (LSE: IMT)Unilever (LSE: ULVR) and SABMiller (LSE: SAB) have all outperformed the wider FTSE 100 over the past year. 

Indeed, over the past 12 months, excluding dividends, Unilever has gained 16.3%, SAB has gained 7.4%, British American has added 11.8% and Imperial Tobacco has surged 34% higher. The FTSE 100 has risen 1.6% excluding dividends over the past twelve months. 

However, after these gains all four companies look expensive. For example, Imperial, British American, Unilever and SAB trade at forward P/Es of 16.1, 18.2, 22.3 and 22.4 respectively. 

So, should investors avoid these companies due to their high valuations, or is it worth paying such a higher earnings multiple for the shares? 

Slow and steady

British American, Imperial, Unilever, and SAB are all defensive consumer-goods plays, which means that investors look to these companies as a safe haven in times of market volatility. 

Therefore, investors are willing to pay a premium to get their hands on the companies’ shares. 

Nevertheless, despite their defensive nature, there is such a thing as paying too much for these businesses. Take Unilever for example. At present levels, the company is significantly more expensive than it has been at any time during the past decade.

Since 2005, Unilever has traded at an average forward P/E ratio of 16. During the run-up to the financial crisis, Unilever’s forward P/E never exceeded 18. 

And on this basis, the company looks expensive. Based on historic figures Unilever’s implied price, which assumes that the company should be valued at the five-year average forward P/E level, is 2,374p, 19.1% below the current price. 

Similarly, SAB is trading at its highest valuation in over a decade. SAB’s implied price, which is based on the company’s five-year average valuation, is 2,789p, once again, 19% below the current price. 

British American isn’t as expensive as it was earlier in the year. A robust trading update from the company at the end of last month inspired analysts to revise their earnings estimates for the company higher. That said, the company is still expensive by historic standards. Based on five-year trends British American’s is currently overvalued by 19.4%. 

Of the four companies in this article, Imperial is the cheapest on several different metrics. While the company currently trades at a forward P/E of 16.1, City analysts expect the company’s earnings per share to expand by 38% this year and 12.7% during 2016. By 2017, analysts have pencilled in three-year pre-tax profit growth of 100% — the kind of growth that’s worth paying a premium for. Also, Imperial’s dividend payout is expected to rise 10% per annum for the next three years. The company currently supports a dividend yield of 4.2%. 

The bottom line

So overall, at present levels Unilever, SAB and British American all look to be overvalued based on historic figures. However, Imperial looks cheap as earnings are set to double over the next three years. 

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Rupert Hargreaves owns shares of Imperial Tobacco Group. 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.