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Investment Times

Consumer goods at home and abroad

| 19 September 2017 | A A A
Consumer goods at home and abroad

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

We’ve often argued the case for consumer goods companies in the Investment Times.

Products like shampoo and coffee are individually small purchases, and things have to get bad before consumers downgrade to own-brand alternatives.

Once consumers settle on a brand, they often stick with it through thick and thin, allowing manufacturers to raise prices without impacting sales.

There’s a tendency when talking about consumer companies to focus on UK names. But there are consumer goods businesses the world over that sell products we all use every day.

Nicholas Hyett, Equity Analyst

Combined with multi-billion dollar marketing budgets and exposure to a growing global middle class, this helps drive growth. As a result the sector has been able to deliver rising dividends over long periods, though as ever, there are no guarantees.

Remember past performance is not a guide to future returns, and yields are not a reliable indicator of future income. The value of investments can fall as well as rise so you could get back less than you invest.

Compound dividend growth

Past performance is not a guide to future returns Source: Bloomberg, as at 31/08/17

Switzerland: Nestlé

Nestlé is best known for coffee, dairy and confectionary products. However the Swiss giant’s portfolio also stretches into Felix cat food, San Pellegrino soft drinks and Herta frankfurters, giving it the world’s most valuable portfolio of food brands.

As you might expect it has significant European exposure, about 26.8% of sales. Aspirational products should mean it’s wellplaced to benefit from economic recovery across the Channel. The Americas still account for the majority of sales though.

Steadily growing profits have, historically, found their way through to shareholders. The group has grown dividends for 22 years consecutively, and analysts forecast a yield of 3.1% for 2018.

However, increasingly health-conscious consumers haven’t done the confectionery and ready meal lines any favours. The group has responded with its ‘nutrition, health and wellness’ strategy, with salt, sugar and fat being cut. Nestlé has adapted time and again over its 150 year history - we see no reason for that to change.

Nestlé share price, charts and research

United States: Procter & Gamble

Home and Hygiene is Procter & Gamble’s sweet spot - look on the back of your shampoo or cleaning products, chances are you’ll see the P&G name.

2015 was a difficult year, but since then P&G has steadily grown margins as it looks to streamline its operations - disposing of 105 brands in two years. Improving margins and a share buyback programme mean underlying sales growth of 2-3% is expected to translate into 5-7% earnings per share growth in the years ahead.

With 90+% of profits expected to drop through to free cash, P&G should be wellplaced to maintain an impressive dividend record of increasing payouts annually for the last 61 years. The stock currently offers a prospective yield of 3.1% for 2018.

P&G has recently been in a tussle with activist investor Trian over the latter’s attempt to gain a seat on the board. These kinds of dust-ups can be an unwelcome distraction, but so far management has stood firm behind the strategy.

Procter & Gamble share price, charts and research

UK: Reckitt Benckiser

A wealth of opportunities abroad shouldn’t mean investors discount domestic names – even if they’re out of favour. Reckitt Benckiser shares are looking a bit unloved at the moment, reflecting fears over litigation in Korea (where a dehumidifier product caused respiratory problems) but also the $17.9bn deal to buy formula milk specialist Mead Johnson.

MJ had been struggling for some time, allowing Reckitt to pick up a leading position in infant nutrition at an arguably bargain price. However, the deal leaves Reckitt under pressure to stage a turnaround in a sector where it has limited expertise.

For all that, Reckitt has an excellent track record in growing brands – with sales from its ‘powerbrands’ accounting for 80% of revenue in 2016. If CEO Rakesh Kapoor can work the same magic on the MJ portfolio, the policy of paying out 50% of profits could see Reckitt maintain a record for sustaining or growing the dividend that stretches back to the late 1990s. Analysts are currently forecasting a 2018 prospective yield of 2.7%.

Reckitt Benckiser share price, charts and research

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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