Crossing the Atlantic for Consumer Blue Chips

Jayson is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At a young age, I always asked my uncle what stocks I should buy. The simple answer was blue chip consumer staples. Blue chips, he explained provided all the benefits with much less risk. I could enjoy the rise in the market and reap a hefty dividend while avoiding market crashes. It seemed too good to be true, but this conventional wisdom holds true. Jim Cramer consistently harps on dividends, and so does any other right-minded value investor. However, I’m not going to recommend companies like Procter & Gamble and Johnson & Johnson. No, those were my uncle’s Blue Chips. It’s time to go on my own and discover consumer staples we will tell our children to buy.

Unilever (NYSE: UL) is a producer of consumer staples on par with P&G and J&J. Unlike the two United States Stalwarts, Unilever is an Anglo-Dutch company, with powerful leadership and market exposure in the Americas, Asia, Africa, and Europe. With brands like Lipton, Dove, Hellman’s, Vaseline, and Slimfast their products are known around the world for quality and value. While P&G had a solid second quarter as its profit saw a substantial rise, they still have an uphill fight as they continue to lose market share to low cost brands. Unilever on the other hand has seen organic sales improve in emerging markets, and it continues to maintain its dominant market share in all business segments. This is especially impressive considering the global economic crisis.

It is my opinion that Unilever’s portfolio of flagship brands is less likely than Procter & Gamble’s to be subjected to low cost replacements. While it is very easy to replace your Tide detergent with a lower cost grocery brand, Lipton already offers a low cost option for tea. Unilever also outpaced P&G and its competitors on return on investment. This proves that its innovation in all segments adds to its growth prospects. Like most companies in the home product industry, Unilever pays a solid dividend of 3.2%. My final argument for Unilever over P&G is that Bill Ackman's continued presence and pressure on P&G could inevitably cause irreversible damage to the stalwart.

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>P/E Ratio</strong></p> </td> <td> <p><strong>Market Cap</strong></p> </td> <td> <p><strong>ROE %</strong></p> </td> <td> <p><strong>Yield</strong></p> </td> </tr> <tr> <td> <p>Procter & Gamble</p> </td> <td> <p>19.5</p> </td> <td> <p>$189 B</p> </td> <td> <p>14.4%</p> </td> <td> <p>3.25</p> </td> </tr> <tr> <td> <p>Unilever</p> </td> <td> <p>19.3</p> </td> <td> <p>$110 B</p> </td> <td> <p>30.07%</p> </td> <td> <p>3.2</p> </td> </tr> </tbody> </table>

 

Over the next five years, Unilever will prove why it will become a dominant blue chip. Over the past five years, Unilever has maintained a consistent industry leading return on equity. At 10% Unilever surpasses all of its competitors for return on assets (ROA). A high ROA is a good profitability measure since it reflects the ability of management to produce profit from each dollar of company assets.  In addition, their P/E ratio (19.3x) is below the Household Products Industry average (21.1x). On top of that, their inventory turnover ratio is on par if not better than their competitors. This means that management is capable of getting products out of the factories and into consumer’s homes quickly. For a market cap company of $110 billion, it is fantastic to rival smaller more agile companies like Hillshire Brands and ConAgra Foods. On top of that, Unilever has had positive operating cash flow for the last three years.

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Market Cap</strong></p> </td> <td> <p><strong>Inventory Turnover Ratio</strong></p> </td> <td> <p><strong>Return on Assets</strong></p> </td> <td> <p><strong>Total Revenue</strong></p> </td> </tr> <tr> <td> <p>Unilever</p> </td> <td> <p>$110 B</p> </td> <td> <p>6.61x</p> </td> <td> <p>10.07%</p> </td> <td> <p>$51.3 B</p> </td> </tr> <tr> <td> <p>Danone SA (DANOY)</p> </td> <td> <p>$41.1 B</p> </td> <td> <p>9.0x</p> </td> <td> <p>6.11%</p> </td> <td> <p>$26.07 B</p> </td> </tr> <tr> <td> <p>Hillshire Brands</p> </td> <td> <p>$3.9 B</p> </td> <td> <p>4.69x</p> </td> <td> <p>4.67%</p> </td> <td> <p>$4.09 B</p> </td> </tr> <tr> <td> <p>Kraft Foods Group </p> </td> <td> <p>$27.6B</p> </td> <td> <p>6.91x</p> </td> <td> <p>8.53%</p> </td> <td> <p>$18.7 B</p> </td> </tr> <tr> <td> <p>ConAgra Foods</p> </td> <td> <p>$13.6 B</p> </td> <td> <p>5.7x</p> </td> <td> <p>4.06%</p> </td> <td> <p>$13.2 B</p> </td> </tr> </tbody> </table>

 

Through careful analysis, I feel Unilever has the potential to outperform all of its competitors. I also believe that just like my uncle preached wonders about P&G, I will one day revel in the successes of Unilever. I will initiate a buy position once there is an opportunity in the share price.


JayFacawi has no position in any stocks mentioned. The Motley Fool recommends Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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