The last few trading sessions have seen greater volatility coupled with rapid sell-offs in broader markets, but especially in stocks that can be richly valued.
In times like these, market participants seeking both stability and passive income often look to basic consumer goods. So today we're discussing Unilever (LON 🙂 (NYSE 🙂 and Reckitt Benckiser (LON 🙂 (OTC 🙂 – two global giants in consumer goods.
Why Invest in Basic Consumer Goods?
Regardless of the state of the economy, we all rely on basic commodities. That's where the consumer goods industry comes into play. It is considered non-cyclical while the demand is all year round. The income and cash flows are therefore generally stable. Seasoned investors know they can count on these companies over the long term. In addition to their appeal, most also pay dividends.
US-based investors usually pay attention to the information that measures the strength of the industry. Subsectors include household products, beverages, food and personal hygiene products. During the market correction in 2018, consumer staples was the second worst performing sector after energy. Still, 2020 has meant a different dynamic for the industry.
S&P 500 Consumer Staples Index 10-Year Chart.
Looking at the increased demand for the essential needs of global citizens, such as during the early days of the COVID-19 pandemic, adding shares of commodities companies can reduce the overall volatility of a portfolio.
The consumer goods sector has many high-quality companies with well-known brands and robust foundations. And we would rate Unilever and Reckitt Benckiser as two of the best in their class.
At the end of July, the fast-moving consumer goods giant announced results. Underlying sales (which are comparable to organic sales of US-based companies) declined 0.1% in the six-month period ending in June. Analysts had expected the number to be much worse.
Underlying earnings per share increased 6.4%, including a negative impact of 3.7% from currency movements. Investors were pleased with the trading statistics, including performance in North America and levels of free cash flow and liquidity.
Alan Jope, CEO of Unilever, said:
"Our focus for the remainder of 2020 will remain on volume-driven competitive growth, absolute profit and cash delivery as this is the best way to maximize shareholder value."
Unilever operates in three segments: Personal Care (the most important segment by revenue), Home Care, and Food & Refreshment. As a result of changing consumer habits and various lockdowns during the pandemic, performance varied between categories.
On any given day, households worldwide use many of Unilever's brands, including Lipton, Knorr, Colman's, Marmite, Magnum, Ben & Jerry's, Cif, Dove, Persil, Rexona, Surf and Vaseline.
In the first half of 2020, food and drink products, including ice cream and tea, benefited. Hygiene products too. However, sales in movie theaters and restaurants are understandably down.
Year-to-date, shares are up about 9%. This increase excludes the juicy dividend yield of over 3%. Shares of Unilever closed at $ 4,784 in London and $ 61.09 in New York yesterday. Forward P / E and P / S are at 20.41 and 2.66, respectively.
We think the stock would provide a greater margin of safety in the event of a 5% -7% price drop.
Reckitt Benckiser also published half-year and 2020 results at the end of July. Sales on a comparable basis (LFL) increased 11.9%. The operating profit margin was 24.5%. In general, analysts were impressed with the statistics.
Reckitt Benckiser 1-Year Pass.
CEO Laxman Narasimhan stressed:
"We have the largest portfolio of surface disinfection brands including Dettol, Lysol and Sagrotan … Overall, our e-commerce leadership contributed to very strong sales growth of over 60%, with a E-commerce sales are now estimated to account for 12% of net sales for the first half of the group. "
The company reports revenues in two segments: hygiene (approximately 40% of revenues) and health. Some well-known brands include the disinfectant Dettol (sales increased by more than 60%), as well as Lysol, Mucinex, Nurofen and VMS. Hygiene products experienced strong double-digit growth in most regions, including North America.
The company typically sees higher spending on its health products in the fall and winter, likely to boost results in the second half of the year.
So far in the year, stocks are up about 20%, technically putting them in a bull market region. They closed at $ 7,564 in London and $ 19.34 in New York yesterday. The current stock price supports a dividend yield of just over 2%. Forward P / E and P / S are at 24.81 and 3.95, respectively.
Like Unilever shares, we would feel more comfortable investing in Reckitt Benckiser in the long run if the price were to fall by about 5%.
September continues in a choppy tone. A shrinking economy due to the pandemic carries risks that could negatively impact broader indices for the rest of the year.
Still, we think there are still plenty of robust companies out there that could be well suited to many portfolios worldwide. Even if the economic contraction were to last longer than initially expected, buying the dips in both Unilever and Reckitt Benckiser could provide some measure of diversification.
Their management is proactive in reshaping the portfolio to better respond to changing consumer trends in the current environment. Finally, both companies are making impressive progress in high growth economies, including emerging markets. Therefore, investing in both would provide global exposure to long-term portfolios.
Three other US-based consumer companies that may be equally suitable are Colgate-Palmolive (NYSE :), Clorox (NYSE :), and Procter & Gamble (NYSE :).
Investing.com will likely cover the industry again in the coming weeks.