As volatility swirls in the economy, investors like me seek refuge in mundane stocks with a track record of retaining value. Predictability and durability are critical when the yield curve has inverted and global trade is at risk.
While some investors might diversify into gold, real estate or even Bitcoin at times like these, I prefer to invest in companies with stable cash flows, low debt, considerable global diversification and a product that is seemingly indispensable. Unilever (LSE: LON:ULVR) seems to fit the bill perfectly.
Despite all the turmoil in the UK and around the world over the past five years, Unilever’s stock is up a whopping 75% over that period. Meanwhile, the company’s dividend payout ratio has been growing at double the rate of inflation, making it one of the most robust income stocks on the FTSE 100.
Unilever’s strength is derived from its diversity of products and regions of operation. Here’s a closer look at both.
Product mix Unilever’s products fall into one of three broad categories — home care, personal care and food products. From Hellmann’s mayonnaise to Dove soap and Surf laundry detergent, the company’s 400 brands mostly have one thing in common — they’re daily essentials.
Almost nobody is going to give up their favourite brand of shampoo or change their home cleaning supplies because of a recession. Currency swings and interest rates have minimal direct impact on these mundane household decisions. At the same time, all these products are required on a consistent basis, which helps Unilever generate recurring revenue once a new customer is acquired.
After decades of marketing and acquisitions, the company is now so large and ubiquitous that its products are used by an estimated 2.5bn people. For context, that’s one-third of the world’s total population.
Global sales With so many customers, it seems obvious that Unilever’s sales are widely spread out across regions. Over the first half of this year, the company sold nearly as much product in North America (€4.6bn) as it did in Europe (€5.8bn). It sold twice as much in Asia, Africa and Russia combined (€12.2bn), while Latin America contributed 15.5% of total sales.
In other words, the company’s sales nearly perfectly match the distribution of human population around the world. This is diversification taken to the extreme and it means Unilever’s sales are closely correlated with global economic growth, rather than any regional economy or volatility in currency pairs.
The good news is that global growth is expected to be remarkably stable for the next half-century. Estimates from McKinsey and the Organisation for Economic Co-operation and Development suggest that the global economy could expand by an average of 2.1% every year till the mid-2060s. Unilever can expect a similar trajectory as well.
Foolish takeaway Unilever’s business is now so massive that it benefits from the steady growth of the global economy, rather than suffering from regional politics or economic concerns. That means the company can be expected to grow at a rate of low single-digits for decades to come, making it the most reliable FTSE 100 stock for investors like me.
VisheshR has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. 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