Why Unilever plc And Reckitt Benckiser Group Plc Are Getting Too Expensive

Are investors paying too much for safety from Unilever plc (LON: ULVR) and Reckitt Benckiser Group Plc (LON: RB)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Consumer-goods companies like Unilever (LSE: UU)(NYSE: UL.US) and Reckitt Benckiser (LSE: RR)(NASDAQOTH: RBGLY.US) are popular safety stocks when other investments are starting to look a bit risky, but one downside of that is they can quickly get quite scarily priced by usual metrics.

Look at Unilever, whose shares have soared 14% since early January to 2,939p. That takes in a 52-week high on 28 January of 2,993p, and provides shareholders with a 21% gain over the past 12 months.

But look at the valuation it has left the shares on now — based on forecasts for the year ending December 2015, we’re looking at a P/E pf 21.6, which is about 50% ahead of the FTSE 100‘s long-term average of around 14. And for that, you’re only likely to get a decidedly average dividend yield of a bit over 3%.

Should you invest £1,000 in Allied Minds Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Allied Minds Plc made the list?

See the 6 stocks

Safe but pricey

Sure, Unilever produces a range of goods that are not going out of fashion, including Sunsilk, Dove, Flora and Hellmann’s — all brands with sales of more than €1bn a year. So it’s safe and not going to go bust any time soon, but a 50% premium over the FTSE 100 looks too steep to me.

Things are similar at Reckitt Benckiser, which has such staples as Dettol, Lemsip, Air Wick and Scholl under its umbrella. Again, they’re brands that are not going to disappear from supermarket shelves, but again the market might be paying too much for the safety of the shares.

In this case, we see a forward P/E for December 2015 of 23, even higher than Unilever’s. And Reckitt Benckiser’s predicted dividend yield, at 2.3%, is significantly below both Unilever and the FTSE average.

Reckitt Benckiser shares have done even better than Unilever’s over the past 12 months, with a 26% gain to today’s 5,675p — and the 5,690p price they briefly touched on today is another 52-week high.

Cheap oil

The slump in the price of oil, which has been stuck below $50 a barrel for a couple of weeks and doesn’t look like picking up for a long time yet, is surely at least part of the reason for the current flight to safety. But aren’t there better bargains out there?

I reckon the utilities companies are looking better value these days, as lower wholesale energy prices are helping take a lot of pressure off their profit margins. At 291p, for example, Centrica shares can he had on a relatively modest 2015 forward P/E of 14 — and at the same time, the pundits are expecting dividend yields of more than 6%!

Should you invest £1,000 in Allied Minds Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Allied Minds Plc made the list?

See the 6 stocks

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. 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.

More on Investing Articles

Two employees sat at desk welcoming customer to a Tesla car showroom
Investing Articles

Could Tesla stock be a brilliant bargain in plain sight?

Christopher Ruane sees some things to like about Tesla, but as its vehicle revenues have gone into sharp decline, is…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

3 cheap FTSE 250 stocks with big dividends to consider buying right now

The FTSE 250's loaded with so many big dividend yields it's hard to know where to start. These three have…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Up 585%, could Rolls-Royce shares still go higher?

Christopher Ruane likes the Rolls-Royce business but is not so convinced by the value its current share price offers him.…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

I reckon a bull market’s coming! Here’s what I’m buying for my Stocks and Shares ISA

Hoping to capitalise on what he believes is an undervalued UK stock market, our writer’s added more of this FTSE…

Read more »

piggy bank, searching with binoculars
Investing Articles

The UK stock market looks undervalued to me. Here’s 1 growth stock to consider for a SIPP

Our writer explains why he thinks the UK stock market’s currently in bargain territory, and identifies one share potentially worthy…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Meet the FTSE 100 stock I’ve been buying this week

Despite a strong week for the FTSE 100, one stock fell 7% in a day. And Stephen Wright took the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

1 of my favourite growth stocks crashed 20% in a day this week. Here’s what I’m doing

Stephen Wright thinks the market’s overreacting to short-term growth challenges in one of his favourite UK stocks, creating a buying…

Read more »

Young female hand showing five fingers.
Investing Articles

Here’s a 5-stock high-yielding portfolio that could generate passive income of £1,500 a year

Those wanting to earn generous levels of passive income from their Stocks and Shares ISA could take a closer look…

Read more »