There’s loads of money in everyday consumer goods
Expensive markets and an economic growth outlook of approximately 2% in South Africa suggest investors may be disappointed with returns from local equities in the years ahead. Given this outlook, Marriott i s encouraging investors to take advantage of attractive yields on offer from First World megacap stocks. One of these companies is Unilever – a giant in the household staples industry.
The biggest driver of capital growth is dividend growth, so more predictable dividend growth means more predictable capital growth. Unilever’s dividend track record has been consistent and reliable over many years, as can be seen in the chart below.
Marriott invests in companies that tend to share five characteristics, all of which ensure predictable dividend and capital growth: 1) they fulf il a basic need; 2) they own strong brands; 3) they have pricing power; 4) their markets are growing; and 5) they have diversification. Unilever ticks all these boxes. FULFILLING A BASIC NEED Unilever offers a broad range of basic consumer necessities including food,
15 beverages, personal and home-care products that are used by about 2bn customers around the world daily. Because of this, the future dividend prospects of Unilever are unlikely to be materially affected by any change in economic conditions, technology or trends. And this makes dividend growth from the company more predictable. OFFERING STRONG BRANDS The customer loyalty created by Unilever’s strong brands keeps competitors at bay and ensures a consistent demand for the company’s products. Lipton, for example, is the world’s best-selling tea brand. Lux is the world’s most popular soap. PRICING POWER Unilever ’ s br a nd dominance i n consumers’ day-to-day activities allows the company to pass rising input costs on to consumers without sacrif icing turnover and margins. This is evident in Unilever’s operating profit margin over the past 10 years, as shown on the right. GROWING MARKETS Driven by e c onomic g r owth i n emerging markets, almost a quarter of a million people join the middle class
2011 every day. About 57% of Unilever’s revenue comes from these markets and this is favourable for dividend growth. Unilever’s Lux and Lifebuoy brands, for example, are listed in the top 10 consumer brands in India, one of the fastest-growing economies in the world. DIVERSIFICATION Well-diversif ied companies provide more predictable dividend and capital growth as their success is not tied to the fortunes of one particular economy or dependent on the success of one particular product. Unilever certainly has diversification – the company has more than 400 consumer brands, which are sold in 190 countries around the world.
So Unilever ticks all the boxes for producing predictable dividend and capital growth over the long term. And its current dividend yield of 3% is an acceptable entry point for new investors. These are the reasons Marriott believes Unilever should form a core holding in an investor’s portfolio.