Consumer goods shares are highly valued by investors across the world, and with good reason. The stability and predictability of profits and cash flows that comes from selling trusted branded products that are bought week after week by consumers is hard to match.
This dependability has seen the cash flows of consumer goods giants such as Diageo and Unilever compared to the cash flows from bonds with the added attraction of a growing income stream. They are not high-growth companies, but the ability to deliver some growth with a high degree of certainty means that investors are prepared to pay high valuations for their shares. At the time of writing, Unilever shares are changing hands for just over 20 times forecast earnings with Diageo’s selling for just over 22 times on the same measure.
Since the financial crisis a decade ago, these companies have delivered good returns to investors, but it’s not unreasonable to ask how they keep on doing so. Will the price/earnings (PE) ratios go higher and can they continue to deliver reliable, sufficient and sustainable levels of profit and dividend growth?