The International Monetary Fund (IMF) has recently expressed concern over the possibility of the UK leaving the EU without a trade deal. As things stand, we are looking to crash out of the bloc without an agreement on the official Brexit date of 29 March. Given this uncertainty, I think international consumer staples producer Unilever (LSE: ULVR) is a reliable defensive stock to consider.
Strong brands
The consumer staples sector has many high-quality companies that have famous brands and robust fundamentals. And I’d regard Unilever as one of the best in class.
The group operates in three segments, personal care, homecare, and foods and refreshment so with an extensive product portfolio both in the UK and internationally, it covers all basic needs of consumers. On a given day, the average British (and global) household is likely to use many of its brands, ranging from Lipton, to PG Tips, Knorr, Colman’s, Marmite, Wall’s, Ben & Jerry’s, Cif, Dove, Persil, Axe/Lynx, Rexona, and Vaseline.
The strength of more than 400 brands has helped the group achieve a broad geographic reach as well as scale in this competitive industry. Global annual turnover is over £50bn and over a dozen of the brands have annual sales of over £1bn. As these products have high margins, Unilever’s return on capital employed (ROCE), a profitability ratio measuring how efficiently a company can generate profits, has been around a highly-regarded 21%.
The company achieves these numbers through both organic growth and acquisitions. For example, over the past three years, it has finalised 22 acquisitions globally. Sales rises in emerging markets, where there is high economic growth and the appetite to use branded consumer staples, has been impressive. In other words, despite investors’ anxiety about what may happen in the UK or even with the global economy, demand for the group’s products should not falter.
Robust balance sheet
According to its annual report, its “long-term compounding growth model, based on continuously high levels of re-investment” is behind the group’s success. Analysts also highlight Unilever’s improved margins, helped by cost-cutting across the company.
Management is proactive in reshaping the portfolio to better serve changing consumer trends and spending habits and consequently, recent sales volumes have been up across all three of its divisions. As the leader of the three segments, homecare most recently had 4.9% underlying sales growth. For 2019, the group expects sales to rise around 3%-5%.
Success in investing does not need to be too complicated. Essentially, dividends play an important part in portfolio construction. Unilever’s dividend yield is almost 3.5%. Its increasing cash flow is likely to encourage the group to raise dividends in the coming years. In fact, its dividend has gone up by 8% annually since 1979. Due to the strength of its brands, Unilever can put a premium price on most items sold, which translates into profits for the company and dividends for shareholders.
The bottom line
The UK now finds itself without a clear path forward on Brexit. Domestic and European financial markets are increasingly edgy about the outcome so I would suggest that you add a defensive stock to your portfolio.
Consumer staples are not easily affected by such macroeconomic or political developments. Unilever’s revenues, earnings, and dividends have been steady over the years and that translates into an excellent portfolio choice for most investors, I believe.
