If you had invested in consumer defensive giants at the turn of the century there would be reason to celebrate.  Reckitt Benckiser's (LON:RB.) shares are up 11.3X since then and British American Tobacco's (LON:BATS) shares are up 11.6X.  The question now is whether the good times will continue to roll for UK consumer defensive stocks.

In last week’s article on the consumer defensive sector we assessed five drivers and three disruptive trends. In this article we will evaluate the strengths, opportunities and risks facing the UK’s blue-chip consumer defensive stocks.

The five FTSE 100 groups remain extremely profitable with operating margins as high as 43%.  However, revenue growth has slowed down and valuation multiples in the sector (with the exception of tobacco) have increased.


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State of UK consumer defensive giants

Diageo

Reckitt Benckiser

Unilever

Imperial Brands

British American Tobacco

5 year annualised Revenue Growth

1.5%

3.8%

0.9%

1.1%

5.2%

Operating profit margin

30%

23.6%

18.6%

43%

38%

Forecast rolling P/E ratio

22X

19.6X

20.2X

10.9X

13.4X

Net gearing inc pension

90%

80%

216%

268%

74.5%

Share price since 2000

4.6X

11.3X

3.4X

7X

11.6X

Diageo: premium & emerging market opportunity

Diageo (LON:DGE) is one of the world’s largest spirit groups and its brands are well established. The group’s six “Global giants” - Guinness, Johnnie Walker, Smirnoff, Captain Morgan, Baileys and Tanqueray – generate 41% of net revenue.

Increasing premium sales, such as Jonnie Walker Black Label, have been an important profit driver for Diageo.  Management has also focused on supporting the performance of three key areas: scotch, US spirits and India.

Jonnie Walker: “one of the first truly global brands”

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Source: Diageo

The majority of Diageo’s profit is generated in the West and the group therefore has scope to expand in faster growing markets.  Diageo’s Asia Pacific sales increased 9% in fiscal 2018 and Latin America & Caribbean sales were 7% higher.

A key risk for Diageo is that disruptive new entrants undermine sales volumes and margins.  There has been little evidence of this with net sales higher across all categories in the last couple of years, with the exception of vodka.

Gin has seen an…

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