Why I’m not buying Unilever plc or Reckitt Benckiser Group plc…yet

One Fool believes these so-called safe-haven stocks could lose you money.

| 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.

Unilever sign

Image: Unilever. Fair use.

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.

The FTSE100 has delivered around a 6% annually over the long term. It’s an impressive rate for a low-risk, diversified basket of stocks, but its not going to transform your wealth anytime soon.

Stock pickers recognise that and knowingly take on more risk to accelerate the growth of their savings. Today I’m going to explain why Reckitt Benckiser (LSE: RB.) and Unilever (LSE: ULVR) are unlikely to beat that 6% total return over the next few years, in spite of their ‘safe-haven’ status.

In fact, that’s half the problem and you’d be better off buying the FTSE.

Dividend Distractions

Anyone who keeps half an eye on the bond markets will have noted the historically low yields on offer in recent years.

Low bond yields force investors to’reach for yield’ by investing in riskier or pricier prospects (including stocks) to fulfil their income needs. In my opinion, low yields have pushed these investors towards consumer goods giants such as Unilever and Reckitt, running up the share prices.

This makes a lot of sense. These companies sell an incredibly high volume of small-ticket items under dominant brands, which results in consistent sales and cash generation. Plus, we tend to buy toothpaste, deodorant and other such products no matter what the economy is doing.

These defensive qualities appeal to those desperately scrabbling for income, but since the US voted for Trump, bond yields have been climbing rapidly. The yields on even safer vehicles have resulted in a flight of capital out of consumer goods giants and back to the credit markets.

The Fed recently announced the first interest rate rise of the year (and only the second in the past decade) and has predicted further hikes in 2017. If they come to pass, those rate rises will drive bond yields higher still and even more investors will dump so-called safe-haven shares.

Steep price for a cheery consensus

While it’s true that both Unilever and Reckitt are great businesses, it’s also true that this is no secret. Investors and analysts alike have long-championed these companies as suitable core holdings. The underlying businesses are wonderful, I agree, but investors are likely to earn sub-par returns based on current prices.

Unilever trades on a PE of 22 and Reckitt on a PE of 28, which in my opinion is far too high considering lacklustre growth. Reckitt has only grown earnings per share by 1.6% since 2011, while Unilever has barely grown earnings since 2013.

There are short-term headwinds facing these businesses too, including weak sterling that will likely increase the cost of importing raw materials.

These factors could place significant downward pressure on the share prices of these widely-loved companies. Investors would therefore be better served by sitting on their hands and waiting for a better entry point than the 2.7% and 1.9% yields on offer at Unilever and Reckitt respectively. At the very least, I’d expect these companies to yield significantly more than the FTSE 100’s 3.8% before considering a purchase.

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.

Zach Coffell has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Reckitt Benckiser. 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

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

Is this the new Shopify? Why I just bought this explosive growth stock

This under-the-radar business is on Zaven Boyrazian’s best-stocks-to-buy-now list because of its explosive potential to deliver Shopify-like returns!

Read more »

Investing Articles

At 17.7%, this energy stock has the highest dividend yield in the FTSE 350

This oil & gas enterprise has promised $500m worth of dividends in 2024 and 2025, pushing its yield to the…

Read more »

Investing Articles

This S&P 500 stock just hit $1 trillion! Which one will be next?

This often-overlooked semiconductor business just surpassed a $1trn market capitalisation as demand for its AI chips explodes to record highs!

Read more »

Investing Articles

Down 70% with a P/E of 3.5! Is this FTSE 250 stock on the verge of a MASSIVE comeback?

Motor finance lenders are getting a second chance in court that could avoid £30bn in penalties. Is this FTSE 250…

Read more »

Investing Articles

This FTSE 100 stock’s down 50% with a forward P/E of just 6.6! Is it a screaming buy for me?

This FTSE 100 homebuilder surged 40% during most of 2024 before crashing, creating what looks like a lucrative buying opportunity.…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Is Nvidia heading for the mother of all stock crashes in 2025?

After a seemingly unstoppable rise, is AI chipmaker Nvidia's stock going to suffer badly if the current AI boom cools…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Fancy a 13.9% dividend yield? Consider these dirt-cheap investment trusts!

These investment trusts are trading at whopping discounts to their net asset values (NAVs). Here's why they could prove to…

Read more »

Investing Articles

If the market shut down for 10 years, I’d be happy to hold these 2 FTSE 100 shares

Our writer reveals a pair of FTSE 100 shares that he reckons are well set up to deliver strong returns…

Read more »