The Motley Fool

Forget gold, buy to let, and Cash ISAs. I’d rather buy Unilever and Reckitt Benckiser

Household goods giants Reckitt Benckiser Group (LSE: RB) and Unilever (LSE: ULVR) have long been two of my favourite stocks on the FTSE 100.

Star pupils

Over the years I have showered them with praise, and they have justified my faith, as their share prices and dividends have continued to grow. However, in recent months I have largely forgotten about them. Instead of regularly checking up on their progress, my attention has drifted elsewhere.

As global growth appears to be slowing, defensive stalwarts like these two could prove their worth all over again, to support your portfolio in turbulent times to come. Unlike gold, they pay dividends. Unlike buy-to-let properties, you don’t have to deal with tenants. And unlike a Cash ISA, you get a decent yield.

So what have they been up to lately?

Wreck it Benckiser

I’m sad to report that Reckitt Benckiser is on the naughty step, as its share price is down almost 6% in the last year, and 18% over three years. Unilever is still my star turn, up 12% over one year, and 36% over three years, easily beating the FTSE 100, which grew a sluggish 2% and 5% over the same period.

So how did Reckitt wreck it? Last month it cut full-year sales growth forecasts from 2%–3% to flat or worse, blaming slowing demand from the US and China, although the rest of its figures weren’t too bad. Slippage like this can be a buying opportunity, especially if it encourages the company to sharpen up its act, as chief executive Laxman Narasimhan is now pledging to do.

Vanishing act

The dip in the Reckitt Benckiser share price offers a cut-price entry point, with its shares now trading at just 17.3 times forward earnings. That counts as bargain territory for this company, which I would typically expect to trade closer to 24 times earnings. The forecast yield is modest at 2.9%, covered twice.

Disappointingly, City analysts currently forecast three years of flat earnings growth, so if you take a position today, you may have to be patient. You should be rewarded in the long run, though. Solid, everyday brands like Dettol, Strepsils, Airborne, Air Wick, Calgon, Clearasil, Cillit Bang and Durex aren’t simply going to Vanish. See what I did there?

Unilever fever

Unilever has also disappointed investors by recently posting a fall in underlying sales growth from 3.5% to 2.9%. However, this was offset by promising emerging markets growth, and predictions of healthy full-year profit margins and free cash flow. Investors were willing to cut Unilever some slack, and understandably so, given its past top grades.

City earnings projections are promising, with forecast growth of 8% this year and 10% next, by which time the yield should hit 3.4%, with solid cover of 1.55. The Unilever share price is more expensive than Reckitt Benckiser’s, trading at 21 times earnings, although again, it usually trades at an even more elevated valuation. Its top brands include Dove, Lux, Sunsilk, Lifebuoy, Knorr and Lipton – another recession proof line-up.

I’d still buy both today. Unilever is in a better place right now, but Reckitt Benckiser may have more recovery potential, for those who like buying on the dips.

Under-The-Radar Investment

There are a number of small-cap stocks that could be worth buying right now, and our investing analysts have written a FREE guide called “1 Top Small-Cap Stock From The Motley Fool”.

The company in question may have flown under your investment radar until now, but could help you to build a great income from your investments and retire early, pay off the mortgage, or simply enjoy a more abundant lifestyle.

Click here to find out all about it — it's completely free to do so.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.