If I asked you to pick the 10 safest stocks in the FTSE 100, I reckon there’s a good chance you’d include Unilever (LSE: ULVR) or Reckitt Benckiser (LSE: RB). And I think you’d be justified, as their worldwide reach of essential consumer products gives them sector-wise and geographic safety.
But with Unilever’s interim due on 23 July and the same from Reckitt Benckiser scheduled for 27 July, should we be looking to buy or sell now?
Modest growth
Both companies have modest but reasonably attractive EPS growth forecast, and both are off to a decent start this year. In the first quarter, Unilever saw underlying sales up 2.8%, with its all-important emerging markets business up 5.4% — but we did hear that competitive pressure is leading to lower pricing in the developed markets of the US and Europe. And currency movements were in its favour in the period.
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Reckitt Benckiser also put in a good Q1, and though performance in emerging markets was mixed, sales in Europe and North America saw steady growth. Although overall reported sales growth only reached 1%, the firm reported like-for-like growth of 5%.
With the world economy still improving, we should expect a few steady years from both companies now, but the trouble is the share price is already ahead of it. At around the 2,850p mark, Unilever shares have gained 7% over the past 12 months. That’s beaten the index and isn’t bad for a safe stock, but we’re looking at a forward P/E of about 22 now. That’s around 50% ahead of the FTSE’s long-term average P/E, and though Unilever deserves a premium rating, it looks a little too high to me.
Even higher
Reckitt Benckiser is looking similar, with forecasts putting it on an even higher P/E of 25. We’ve seen a 20% hike in the Reckitt share price over the past year, to 5,890p, which is remarkable. But again, I think it’s taken the price up a bit too far now.
Historically, both companies’ shares have tended to trade in a P/E range that tops out in the low 20s, and that’s pretty much where they both are at the moment. Over the past year, the share prices have climbed ahead of earnings rises, which is what happens when future prospects are looking good. But over the next couple of years, I can see that reversing, with share prices not matching EPS gains and those P/E multiples coming down a little.
Weak dividends
And we don’t have much in the way of dividends to rely on, with Unilever expected to come close to the FTSE average yield of around 3%, and Reckitt only managing about 2%. Both companies might be worth adding as a safety bolster to your portfolio during a cyclical downturn, but at today’s prices I just think there are better safety bargains to be had with better dividend yields.
