This article is the third installment in a 5 part series discussing stocks to purchase for retirement.
I believe the five stocks I will discuss in this series of articles are excellent for retirement given the following:
- Strong, appropriate yields that allow for comfortable living
- Excellent companies with superior economics and management
- Dividend growth that is in-line or outpacing real inflation (which I characterize as roughly 4%)
- Essentially no "blowout" risk (Derivative, political, etc. types of exposure)
While some of these stocks may have yields that are a bit too low to have a large weighting in a retiree's portfolio, buying them a few years before you actually need the income will give you the double benefit of strong unrealized capital gains and a much improved yield on cost.
Unilever PLC (UL)
Unilever is a UK based consumer goods company with steady and predictable cash flows - a nice business for retirees to be heavily invested in. While the Unilever name may not be as recognizable as Procter & Gamble (PG), the brands that UL sells are extremely well-known and broad.
Let's take a look at some of UL's valuable brand names:
- Ben & Jerry's
- St. Ives
The depth and diversity in the names is exciting from an investment perspective for several reasons.
First of all, the demand for these sorts of products is largely inelastic; it's difficult to imagine a world where consumers stop buying Dove soap because times are tough. Furthermore, from a pricing standpoint, it's quite easy for UL to pass on costs. If you've used Dove soap since you were a baby, chances are a $.10 increase per bar isn't going to deter you enough to buy a cheaper brand. Warren Buffett calls it "share of mind." Brand names like Dove and Vaseline produce strong psychological attachments, and results in above-average demand schedules.
As for business performance, Unilever has had a long history of steady, growing free cash flow and underlying sales growth.
Net profit (in euros) for the past 5 years is as follows:
- 5,245 (2007)
- 6,433 (2011)
Over the last decade, the company has averaged annualized EPS growth of 15%. For the last five years, the company has averaged returns on equity of 33.8%, without the use of extensive leverage (net debt is about 2.5 times net income). UL has also managed returns on invested capital of nearly 22%.
Now for the dividend. Unilever currently yields 3.80%, and the payout has grown at a 10% annual clip for the past decade.
It is very important to note that currently, almost all (100%) of annual free cash flow is disbursed in annual dividend payments to shareholders. Don't let this fool you: UL has been on an advertising spree to increase brand recognition on some of their newer products, and based on their ROIC above 20%, I'm pretty confident this temporary increase in CAPEX spending will reap plenty of rewards. Averaged out, annual dividend payments from UL take up about 70-75% of FCF. Also of note is that the FCF figure I used for calculations was provided by the company; UL defines FCF as operating cash flow - CAPEX - Income Taxes Paid - Net Interest and Preference Dividends Paid. Final FCF is far more realistic compared to most firms.
UL is one of the few companies I've researched that has such a strong position in Africa. Its Asia/Africa group had over 10% in sales growth compared to 2010. In Africa alone, UL made 3 billion euros in 2011, and the company expects that number to double by 2016. At $6 billion, nearly 10% of Unilver's annual revenues would be derived from this rapidly growing and underpenetrated market.
Cash flow conversion has also been solid, and it's important to note that 2011's FCF was a temporary decrease within a broader trend of sufficiently growing cash flow. In 2007, FCF came in at $2.49 billion, and 2011 FCF was $3.08 (compared to $3.4 bb in 2010), good for about 5% annualized growth, even in spite of large CAPEX spending.
There are several factors that make Unilever an excellent addition to retirement portfolios:
- Strong market diversity: With operations in Africa, Asia, and the Americas, UL is not overly dependent on any particular market
- Predictable cash flows: Investing in consumer goods giants like UL won't make you fabulously wealthy, but the cash flows are easy to predict, the dividend growth is stable, and it's easy to sleep at night knowing that the products your holding sells will always be in demand
- Strong dividend growth: With a 10-year average of about 10% annual increases and reasonable FCF growth, investors will easily outperform annual inflation while realizing an excellent current dividend of 3.80%.
Having a consumer goods company that produces a nice income stream is a must in retirement portfolios. Procter & Gamble is far too bloated and its management is in question, making it a less attractive choice compared to UL.