Warren Buffett is undoubtedly one of the world’s greatest investors and he didn’t get where he is today by making bets on the success of highly speculative mining companies. Buffett only invests in the best companies, which have wide moats, a reliable income stream, intelligent management and a history of success. A strong brand is also important to Buffett, as without that, the company in question will struggle to rise above the competition.
Buffett himself rarely invests outside of the United States, but there are non-US companies out there that easily conform to all of his criteria. Indeed, Unilever (LSE: ULVR) has all the qualities Buffett usually looks for in a prospective investment.
Unilever’s moat is wide and deep. The company makes and sells products under more than 400 brand names worldwide with two billion people using its products on any given day. Several of the company’s power brands generate more than £1 billion in sales annually. It takes years to build up the brand portfolio and loyalty Unilever now commands. And, as almost all of Unilever’s brands are everyday items that have become an essential part of consumers’ lifestyles, the company has a reliable income stream, with sales also subject to positive cyclical factors.
Between 2005 and 2014, Unilever’s sales grew at a rate of 2.9% and 7.4% annually – a period when many other businesses were struggling with the effects of the financial crisis. This steady growth, through both the good times and the bad, has translated into outstanding returns for shareholders. Since 2005, Unilever’s shares have returned an impressive 10.8% per annum excluding dividends, more than double the return of the FTSE 100 over the same period. Including dividends, Unilever’s total return for each of the past 10 years has been somewhere in the region of 13% to 16%.
These figures are all highly impressive, but what really makes Unilever stand out from the crowd is the company’s return on capital employed, or ROCE for short. ROCE is a telling and straightforward gauge for comparing the relative profitability levels of companies. The ratio measures how much money is coming out of a business, relative to how much is going in and is an excellent way to measure business success.
Company ROCE figures can vary dramatically from year to year, but if you can find a company with stable ROCE that’s higher than the market average, you’re onto a winner. According to my figures, only one-third of the world’s 8,000 largest companies managed to achieve ROCE of greater than 10% last year. However, over the past 10 years Unilever’s average annual ROCE has been in the region of 22%.
It’s usually worth paying a premium for a company such as Unilever with a high, stable ROCE and wide moat. But right now Unilever is only trading at a forward P/E of 21, which means that the company’s shares are around 10% cheaper than those of international peers P&G and Colgate-Palmolive.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended 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.