The FTSE 100 has enjoyed a refreshing surge after a difficult year, and most investors will give thanks for that. However, two stocks have had no need of a Brexit bounce: household goods giants Reckitt Benckiser(LSE: RB) and Unilever(LSE: ULVR).
These companies are starting to look indestructible. The financial crisis couldn't dent their armour, as shoppers still needed to buy everyday goods such as washing powder, soap, shampoo and kitchen cleaning agents. They survived the emerging markets slowdown as Asian consumers cut back on luxuries rather than essentials. And they've been major beneficiaries of Brexit, because they generate the vast majority of their earnings from overseas and the falling pound against a basket of currencies will boost earnings when converted back into sterling.
Both stocks are up more than 25% over the past 12 months, so can they repeat the trick over the next year? History would suggest there's a very good chance. Over five years, Reckitt Benckiser is up 123%, while Unilever is up 80%, with their share prices increasing steadily year after year. That's before re-invested dividends, so the total long-term return is even higher.
Mr Woodford regrets
Ace dividend manager Neil Woodford doesn't make many high-profile mistakes but he isn't infallible. He sold Reckitt Benckiser in October 2014, claiming that although it's "a great business with a very strong management team and an excellent product line-up," it was too expensive. Maybe it was, but that was a price investors were justified in paying: the stock is up 44% since then. Today, Reckitt Benckiser is looking expensive even by its pricey standards, trading at a whopping 28 times earnings.
You won't be surprised to hear that the dividend is now a relatively low 1.87%. Forecast earnings per share (EPS) growth of 9% this year and 10% in 2017 might help to keep the show on the road but Reckitt Benckiser finally looks too expensive, even for a fan like me. Then again, penny-pinchers have been proved wrong before.
Price of success
Unilever has been much-admired for years, and has consistently justified that admiration. However, it's also expensive at nearly 25 times earnings, and although its dividend yield is a slightly more respectable 2.47% it's still far below the FTSE 100 average of 3.7%. Again, growth prospects look promising, with a forecast EPS rise of 4% this year and 8% in 2017. Operating margins of 14.1% and a return on capital employed of 116% paint a pretty picture. The dividend is covered 1.4 times and nobody's losing sleep over its sustainability.
Reckitt Benckiser and Unilever have posted yet another stellar 12 months, helped by the Brexit effect, and I don't expect this to reverse in the year ahead. Both have such admirable defensive qualities that if the global economy hits a rough patch, investors will only embrace them with greater ardour. The problem is that today's high valuations and low yields leave slim pickings for latecomers. It's a big ask to expect them to grow another 25% next year.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended 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.