The first few months of 2016 were extremely volatile for most investors. The FTSE 100 lost more than 10% of its value between the 1 January and mid-February, and few stocks were unable to escape the broader market decline.
Yet shares in Unilever (LSE: ULVR), PZ Cussons (LSE: PZC) and Reckitt Benckiser (LSE: RB) did manage to escape much of the broader market decline and are currently showing impressive double-digit returns for the year. Indeed, year-to-date shares in Unilever are up 9%, shares in Reckitt are up 7% and shares in PZ Cussons have gained 5%.
However, after these impressive gains these three leading consumer goods companies are all trading at premium valuations. For example, Unilever trades at a forward P/E of 21.3, Reckitt trades at a forward P/E of 24.4 and PZ Cussons trades at a forward P/E of 18. These lofty valuations may scare most investors away from this trio of consumer product giants but it’s often worth paying a premium price to take a stake in a premium company.
Defensive products
Reckitt, Unilever and PZ Cussons all produce a selection of essential everyday household items, the sales of which are easy to predict and this means that these companies are extremely defensive investments.
What’s more, these three companies all manufacture a range of branded products with strong customer loyalty, giving them pricing power. This pricing power means that these companies can hike prices to improve margins steadily over time, and it’s unlikely the consumer will move to a different brand.
All in all, a range of defensive everyday products, coupled with the ability to set prices and maintain consistently-high profit margins are two factors that enable Reckitt, Unilever and PZ Cussons to stand head and shoulders above the wider market.
Return on capital
The best way to demonstrate how defensive Reckitt, Unilever and PZ Cussons are is to use the financial ratio, return on capital employed.
Return on capital employed, or 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.
The higher this ratio is, the better. According to my figures, only one-third of the world’s 8,000 largest companies managed to achieve an ROCE of greater than 10% last year.
Reckitt, Unilever and PZ Cussons all generate an ROCE that puts the rest of the market to shame. Over the past decade, Unilever’s average annual ROCE has been in the region of 22%. Reckitt’s has come closer to 30% per annum.
PZ Cussons is the runt of the group and has only been able to generate an average ROCE of 15% during the past six years. Still, this figure is higher than the majority of the wider market.
And with their leading product ranges, as well as pricing power, these consumer goods groups should be able to maintain their impressive returns on capital and continue to outperform.
