A Defensive Stock To Protect You From The Looming Correction
There is a growing fear among investors, both at home and abroad, that a long-overdue market correction is round the corner.
The current bull market is approximately 76 months old, far longer than the historical average duration of 48 months. The Greek debt crisis has created uncertainty for the future of the European Union, at times causing ripples through the global markets. And over the last month, the Chinese markets have been reeling after nearly $4 trillion of value was lost. All the while, the U.S. Federal Reserve is still toying with the idea of raising interest rates sometime this year.
The result: an uneasy feeling about the market’s near-term future.
In uncertain times like today, investors should focus on high-quality stocks that have historically shown resilience no matter the market conditions. That being said, it is also time for investors to take a long-term view of their investments and keep in mind that a correction is a buying opportunity, not a time to panic.
First, let’s examine how macro trends could affect the investment playing field and what this means for investment opportunities.
If and when the economy shows signs of sustained strength, the Fed will lift its benchmark short-term interest rate from zero. This should further strengthen the U.S. dollar, which in turn would increase U.S. demand for products from Europe and Asia and boost corporate profits in those regions.
A stronger dollar also means a weaker euro, which helps improve the troubled economies of the European Union as European exports become more competitive. The euro has tumbled 19% against the dollar since March, and many analysts believe it has further to fall, particularly following the Fed rate hike.
All of this leads us to Unilever (NYSE: UL).
Unilever is a multinational consumer goods giant, with a market cap of $128 billion, co-headquartered in Rotterdam, Netherlands and London, England. The company owns more than 400 brands including Dove, Knorr, Ben & Jerry’s, Pond’s, Hellmann’s, St. Ives and Vaseline. Think of it as the European counterpart to Procter & Gamble (NYSE: PG).
Much like Procter & Gamble, Unilever is a defensive stock with a track record of holding up in uncertain times. Its steady growth and global presence should provide peace of mind for cautious investors, and its healthy dividend yield of 3% adds an extra degree of security.
But here’s where Unilever has the edge on a stock like Procter & Gamble… Unilever should benefit from exchange rate fluctuations and a strong dollar. Both factors have already added momentum to the company’s revenue and earnings growth, and the benefit is expected to persist into early 2017.
What’s more, Unilever has been able to increase prices across its brand portfolio while still expanding product volume over many years. Investors should consider this international stock for its positive leverage to a strong dollar, and the fact that it has a reasonable valuation (the stock has a forward price-to-earnings ratio of about 20) in an otherwise expensive market. The U.S. dollar is strong relative to the euro and if these currencies remain where they are now, for the rest of the year, the company could expect a tailwind on revenue of around 8%-to-9% for the full year.
A Wide Moat, With An Expanding Product Portfolio
It’s worth noting that Unilever is very much a wide moat business. Demand for products like soap, condiments and ice cream aren’t likely to see huge drops in demand in an economic crisis, and its global reach ensures that weakness in one country can at least be partially offset by another.
In North America, Unilever told Reuters that more positive consumer sentiment was finally translating into low single-digit market growth helped by price increases. Unilever reported better than expected first quarter sales this year and struck a positive tone on the rest of 2015, citing more opportunities in its major markets such as the United States, China and India.
In its 2014 strategic report, the company talked about expanding its presence in new geographic markets and improving its footprint on distribution channels where the firm is under-represented. It is expanding its e-commerce presence in emerging markets by opening a store on China’s JD.com, a cross-border e-commerce platform, to sell its Dove, Pond’s and Vaseline brands.
Unilever derives 60% of its consolidated sales — totaling 48.4 billion euros or $52 billion — from multiple fast-growing emerging markets including India and China. And after joining JD Worldwide, Unilever will be able to effectively meet growing demand from Chinese consumers. Up until now, many of the company’s products are not yet available in the Chinese market.
Though Unilever is divesting its foods business, it is consolidating its position in the personal care industry by making acquisitions of premium products. Earlier this year, Unilever purchased the British brand REN Skincare and completed its acquisition of Procter & Gamble’s Zest and Camay brands. Personal care now accounts for approximately 37% of Unilever’s total revenue and 41% of its operating profit.
A Reliable Dividend Payer
For investors seeking reliable income, this is a world-dominating company that has paid uninterrupted distributions since 1937. Though the company’s dividends fluctuate from quarter to quarter, its strong track record means you can count on overall dividend growth.
Over the past 35 years, Unilever’s dividend has increased by an average of 8% per year. In 2010, it paid out about $1.11 versus $1.50 per share in 2014, a 35% increase. The company has kept its dividend payout ratio at less than 70% over the past five years, and this ensures the company will have ample cash on hand to keep paying reliable dividends in the future. And if history is any guide, they should continue rising.
Risk To Consider: Unilever’s presence in emerging markets exposes the firm to economic and political risks. That said, over time emerging markets have allowed Unilever to deliver consistent growth. Austerity measures in Europe may constrain growth if Unilever raises prices and consumers choose lower-priced value offerings.
Action to take –> Unilever appears poised for long-term growth and should be a safe bet for investors looking for steady gains and dividends. Short-term tailwinds such as favorable exchange rate trends are a nice bonus. And should uncertainty in global markets intensify, the stock should hold up much better than many of the riskier options out there.
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