Are Diageo plc, Reckitt Benckiser group plc & PZ Cussons plc just too expensive?
As the FTSE 100 has rallied this year, three stocks have done better than most. Diageo(LSE: DGE), Reckitt Benckiser(LSE: RB) and PZ Cussons(LSE: PZC) have all outperformed the wider market as investors have looked to these companies to provide stability in an uncertain world.
Indeed, year-to-date shares in Reckitt have gained 7.1%, shares in PZ have added 14.8%, and Diageo has ticked higher by 1.9%. In comparison, the FTSE 100 has only gained a lacklustre 0.8%, excluding dividends, this year.
However, after these recent gains all three of these companies look expensive relative to the wider market. For this reason, some investors may be inclined to avoid PZ, Reckitt and Diageo altogether.
For example, Diageo currently trades at a forward P/E of 21.5, City analysts expect earnings per share to fall by 1% this year, and the shares support a dividend yield of 3.1%. Reckitt currently trades at a forward P/E of 23.8, earnings per share are expected to grow by 7% this year, and the shares support a dividend yield of 2.1%.
PZ is potentially the most overpriced of this group as the company's shares trade at a forward P/E of 18.9 despite the fact that earnings per share are expected to fall by 6% this year, and the shares support a dividend yield of 2.5%.
Look to the long-term
Shares in PZ, Diageo, and Reckitt may look expensive to many investors at first glance but with these companies, you have to look to the long-term when making an investment. This means taking a view of five years or more, and not trying to guess where the price of the shares will be at some point in the next six months.
You see, these three companies are all long-term compounders. They have an extremely defensive business model, with robust cash flows and steady sales growth. Over the years, this steady cash flow and sales growth will add up, and it's likely this growth will continue even during periods of economic turmoil.
So, by investing in one of these three defensive champions, you can sleep soundly with the knowledge that it's unlikely your capital will disappear overnight.
The market has placed a high valuation multiple on PZ, Diageo and Reckitt because investors believe the shares are worth paying a premium for. Over the long term, it's highly likely that these companies will generate steady returns, even if investors have to pay a premium to get their hands on the shares initially.
The bottom line
It's worth repeating but overall, PZ, Diageo and Reckitt may look expensive right now, yet if you're looking for a defensive investment with an investment horizon of five years or more, then these three companies could be exactly what your portfolio needs.
Don't let the high valuation put you off, PZ, Diageo, and Reckitt's shares are still attractive investments.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK owns shares of PZ Cussons. The Motley Fool UK has recommended Diageo and Reckitt Benckiser. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.