Warren Buffett is undoubtedly one of the worlds greatest investors and he didnt get where he is today by making betson the success of highly speculative mining companies. Buffett only invests in the best companies, which have wide moats, a reliable income stream, intelligent management and a history of success. A strong brand is also important to Buffett, as without that, the company in question will struggle to rise above the competition.
Buffett himself rarely invests outside of the United States, but there arenon-US companiesout there that easilyconform to all of his criteria. Indeed,Unilever plc(LSE: ULVR) has all the qualities Buffett usually looks for in a prospective investment.
Unilevers moat is wide and deep. The company makes and sells products under more than 400 brand names worldwide with two billion people using itsproducts on any given day. Several of the companys power brands generate more than 1 billionin sales annually. It takes years to build up the brand portfolio and loyalty Unilever nowcommands. And, as almost all of Unilevers brands are everyday items that have become an essential part of consumers lifestyles, the company has a reliable income stream withsales alsosubject to positive cyclical factors.
Between 2005 and 2014 Unilevers sales grew at a rate of 2.9% and 7.4% annually a period when many other businesses were struggling with the effects of the financial crisis. This steady growth, through both the good times and the bad, has translated into outstanding returns for shareholders. Since 2005, Unilevers shares have returned an impressive 10.8% per annum excluding dividends, more than double the return of the FTSE 100 over the same period. Including dividends, Unilevers total return for each of the past 10years has been somewhere in the region of 13% to 16%.
These figures are all highly impressive, but what really makes Unilever stand out from the crowd is the companys return on capital employed, or ROCE for short.ROCE is a telling and straightforward gauge for comparing the relative profitability levels of companies. The ratio measures how much money is coming out of a business, relative to how much is going in and is an excellent way to measure business success.
Company ROCE figures can vary dramatically from year to year, but if you can find a company with stable ROCE thats higher than the market average, youre onto a winner. According to my figures, only one-third of the worlds 8,000 largest companies managed to achieve ROCE of greater than 10% last year. However, over the past 10years Unilevers average annual ROCE has been in the region of 22%.
Its usually worth paying a premium for a company such as Unilever with a high, stable ROCE and wide moat. But right now Unilever is only trading at a forward P/E of 21, which means that the companys shares are around 10% cheaper than those of international peersP&GandColgate-Palmolive.
After taking all of the above factors into account, analysts here at The Motley Fool have tipped Unilever asoneof the five shareswebelieve you can buy and hold forever.If you’re interested in finding out more, download The Motley Fool’s new free report entitled”5 Shares You Can Retire On“!
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