Why Unilever plc & Reckitt Benckiser Group Plc Are Now Too Expensive For Me

Roland Head explains why he believes Unilever plc (LON:ULVR) and Reckitt Benckiser Group Plc (LON:RB) are now too expensive for new investors.

| 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 giants Unilever (LSE: ULVR) (NYSE: UL.US) and Reckitt Benckiser (LSE: RB) (NASDAQOTH: RBGLY.US) are regularly cited as examples of firms where you pay a premium for quality.

Until recently, I’ve agreed with this view: in recent years I’ve purchased shares in Unilever at around 2,000p and 2,400p, and have no intention of selling them.

However, shares in both companies have climbed by between 15% and 20% over the last 12 months, and I’ve reached my limit: I won’t buy either firm at today’s prices.

Should you invest £1,000 in Diageo 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 Diageo made the list?

See the 6 stocks

Why not?

Unilever and Reckitt don’t seem to be able to meet City expectations — consensus forecasts for Unilever’s 2015 earnings have fallen from 148p to 134p over the last twelve months, leaving the firm on a 2015 forecast P/E of almost 21.

That seems too high, to me, given that in its 2014 results, Unilever warned that market conditions were not expected to improve significantly in 2015.

It’s a similar story at Reckitt, which currently trades on a 2015 forecast P/E of 23 times and offers a prospective yield of just 2.4%.

In fairness, I think the problem might be that City forecasts are too optimistic: Unilever and Reckitt have been quite open about soft conditions emerging markets in their trading updates.

Changing shape

Neither company is standing still in the face of sub-par growth.

Reckitt demerged its pharmaceuticals business into a new London-listed firm, Indivior, earlier this year, in order to sharpen its focus on its core health and hygiene ranges.

Back in December, Unilever said it would move its slow-growing spreads and margarines business into a standalone unit, a move widely seen as a precursor to a sale of this business. This would enable Unilever to focus more heavily on personal care products where profit margins and sales growth are higher.

How much would I pay?

Unilever’s adjusted earnings per share have grown by an average of less than 5% since 2009, while the equivalent figure for Reckitt is 11%.

In my view, Unilever would be more reasonably valued on a P/E of 17, which would give a yield of about 4%, and a share price of around 2,300p.

Reckitt has delivered strong growth and enjoys higher operating profit margins than Unilever, but earnings are expected to fall this year. I’d be happy to pay around 4,500p for Reckitt, which would equate to a 2015 P/E of 18, and a prospective yield of around 2.9%.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

Roland Head owns shares in Unilever. 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

Investing Articles

2 FTSE 100 and FTSE 250 stocks to consider as stock markets plummet!

Looking for lifeboats as growth-crushing trade tariffs loom? Here are two (including a FTSE 100 gold stock) I think merit…

Read more »

Number three written on white chat bubble on blue background
Investing Articles

Just released: the 3 best growth-focused stocks to consider buying in April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Happy young plus size woman sitting at kitchen table and watching tv series on tablet computer
Investing Articles

£10,000 invested in Watches of Switzerland shares 1 year ago is now worth…

Watches of Switzerland shares have been decimated by Trump’s tariffs on Switzerland. Dr James Fox explores whether this is an…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Investing Articles

Growth stocks are crashing! Here’s what I’m doing now

Our writer shares his thoughts as growth stocks get crushed, as well as a favourite from the Nasdaq that he…

Read more »

Investing Articles

What’s going on with the Nvidia share price now?

The Nvidia share price is tanking. Once the most valuable listed company, Nvidia has seen more than $1trn wiped off…

Read more »

Investing Articles

This FTSE AIM stock has £2.3bn in net cash, and a market cap of £2.4bn!

I love this FTSE AIM stock, but it really hasn’t delivered for me yet. The stock trades with crazily low…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

Down 15% in a week! Are these 5 FTSE 100 fallers screaming buys as markets plunge?

Five of Harvey Jones's favourite FTSE 100 stocks all have the same thing in common – they've fallen around 15%…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

2 stocks that have been crushed and now offer a ton of value

Edward Sheldon has been scanning the market for stocks that offer value after the sell-off. Here are two shares he…

Read more »