Over the last decade, investing in companies that make everyday items used by millions of people has been a very profitable strategy.
Investors in Unilever (LSE: ULVR) (NYSE: UL.US), British American Tobacco (LSE: BATS) (NYSE: BTI.US) and Associated British Foods (LSE: ABF) have seen their shares outperform the FTSE 100 by up to 240%.
However, times change and these firms have reported slowing growth in a number of key markets: should you buy, sell or hold Unilever, Associated British Foods and British American Tobacco in todays market?
1. Reliable growth
All three of these firms have delivered remarkable earnings and dividend growth since 2005, but you may be surprised at the firm thats been the top performer:
10-year average annual growth |
Unilever |
British American Tobacco |
Associated British Foods |
Earnings per share |
11.8% |
8.8% |
7.1% |
Dividend per share |
14.9% |
12.2% |
11.0% |
Unilever has been the standout performer over the last decade, increasing its dividend payout by an average of almost 15% per year for ten consecutive years. Thats seriously good.
Interestingly, Unilevers share price hasnt reflected this outperformance Unilever shares have risen by 152% over the last decade, compared to 281% for British American, and 279% for Primark-owner Associated British Foods.
2. Profitability
All three of these firms enjoy strong profit margins and generate decent returns on capital.
In my view, these are key metrics for shareholders, as they indicate how likely a company is to be able to provide rising shareholder returns:
Unilever |
British American Tobacco |
Associated British Foods |
|
2014 operating margin |
16.4% |
38.7% |
8.3% |
2014 return on capital employed |
28.1% |
26.1% |
13.9% |
Interestingly, Unilevers operating profit margin and return on capital employed (ROCE) are both twice as high as those of Associated British Foods, suggesting that Unilever is ultimately a higher quality business.
This is probably due to Unilevers focus on branded consumer products, which command higher profit margins than the wholesale ingredients, which form a large part of ABFs food business.
At BAT, the picture is slightly different: BATs operating margin of 38.7% is stunning, and might lead you to expect a higher ROCE.
However, BAT prefers to calculate operating margin after subtracting tobacco excise, duty and other taxes from total turnover. BATs operating margin including tobacco taxes is around 11%, which is more in-line with its ROCE of 26%.
3. Outlook for growth
Of course, the past is history: as investors, we need to look ahead at what might happen to each firms profits and dividends in the future.
City analysts are currently quite bullish about the outlook at all three firms this year:
Unilever |
British American Tobacco |
Associated British Foods |
|
2015 forecast earnings growth |
12.8% |
5.8% |
3.6% |
2015 forecast P/E |
21.9 |
17.2 |
28.1 |
2015 prospective yield |
3.1% |
4.3% |
1.2% |
In my view, ABFs valuation already prices in a lot of earnings growth, and given how low the firms yield is, I cant see much attraction at current prices.
Unilever and BAT both look reasonably good buys to me although they arent cheap, I believe both are likely to deliver above-average returns over the next decade.
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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.