Associated British Foods (LSE: ABF), Reckitt Benckiser (LSE: RB), and Unilever (LSE: ULVR) are FTSE 100 stocks I consider quality businesses in the Warren Buffett mould. The shares of all three are trading materially below their previous highs – by 26%, 25%, and 19% respectively. Here’s why I’d buy them for 2020 and hold them forever.
Proven quality operator
The fall of the Associated British Foods share price, since making its all-time high four years ago, has come despite the company continuing to post annual revenue, earnings, and dividend growth. In other words, the decline’s not been due to poor business performance, but a de-rating of the shares.
This means investors today are able to buy at a lower multiple of earnings (17.6 times the City’s 2020 forecast) than their predecessors (mid-to-high 20s multiples). Today’s investors are also netting a bigger dividend yield: 1.9% versus as low as 1%.
I think ABF’s valuation probably got a bit rich when the shares were at their all-time high. However, I’m convinced the continuing growth of the company and the 26% discount to the previous high mean the current rating undervalues this proven quality operator, which owns the mighty Primark chain, a range of strong grocery brands (including Twinings and Ovaltine), as well as ingredients, sugar, and animal feeds businesses.
New group structure
Reckitt Benckiser has seen a similar de-rating to ABF since its shares traded at their all-time high two years ago. Investors today are able to buy at 18.1 times forecast 2020 earnings and bag a 2.9% dividend yield.
RB’s earnings have somewhat stagnated for the moment, with the company focused on completing (by mid-2020) a transition into two structurally independent business units: RB Health (brands such as Nurofen and Durex) and RB Hygiene Home (includes the Cillit Bang and Finish brands).
I fully expect RB to return to healthy earnings growth in the coming years, underpinned by the strength of its brands and the new group structure. I’ve also previously suggested investors could see a value-unlocking demerger or disposal of RB Hygiene Home, as a natural extension of its transition into a structurally independent business unit.
Unilever’s shares made their all-time high as recently as September. They were priced then at around 23 times forecast 2020 earnings. Their 19% decline since – including a one-day fall of 7% on Tuesday – means they can now be bought at 18.4 times forecast earnings, and with a generous prospective dividend yield of 3.5%.
Tuesday’s drop came after the company advised it expects sales growth for 2019 to be slightly below its guidance – the lower half of its 3% to 5% multi-year range – with a recovery back in line with that guidance in 2020. It said “earnings, margin and cash are not expected to be impacted,” and I agree with my colleague, Tom Rodgers, who suggested the 7% fall in the shares on the day was an overreaction by the market.
One of the world’s biggest consumer goods groups, with valuable brands such as Dove, Hellmann’s, and Domestos across its categories of beauty and personal care, food and refreshment, and home care, Unilever is a veritable powerhouse. The pull-back in the shares since September means they can now be bought for not much more than the 4,000p offer the company rebuffed in February 2017 from Warren Buffett-backed Kraft Heinz.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Associated British Foods. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019