Why Diageo plc And Unilever plc Are Worth Their Lofty Valuation

Diageo (LSE: DGE) (NYSE: DEO.US) and Unilever (LSE: ULVR) (NYSE: UL.US) are two of the most expensive companies in the FTSE 100. Indeed, at present levels Diageo and Unilever are trading at historic P/Es of 18.5 and 20.3 respectively, significantly above the FTSE 100’s average P/E of 13.7. 

However, Diageo and Unilever have both worked hard to achieve these premium valuations and they are worth every penny.

Best brands

The key to understanding Unilever and Diageo’s lofty valuations is to look in their store cupboards, or in other words, their portfolio of brands. I guarantee that right now, most readers will have at least one product manufactured by either Diageo or Unilever in their homes. 

And this is why investors are prepared to pay a premium to get their hands on the companies shares. Few other companies in the world can claim to own and manufacture a selection of household brands, those that do are in an elite club.

For example, Unilever has over 400 brands with a user base of two billion people — that’s a huge customer base and one that is only likely to expand as the world’s population grows. Diageo also owns some of the world’s most iconic alcoholic beverage brands — can you really put a price on the value of the Guinness, or Smirnoff Vodka brand name?

Working for shareholders

Aside from the ownership of world-beating brands, Unilever and Diageo also possess management teams that are working for investors. With so many companies being accused of not activating in the best interests of shareholders, this is a desirable quality. 

In particular, the management teams of Unilever and Diageo have concentrated on improving the share price and hiking the dividend. Excluding dividends, Unilever’s share price has risen 149% since August 2004, while Diageo’s has gained 154%. Both companies have outperformed the FTSE 100, which only returned 54% over the period. 

In addition, over the past five years alone, Unilever has increased its dividend payout by a compounded 260% and Diageo’s payout has risen 45%.

Emerging market exposure 

The third and final reason why Unilever and Diageo are worth their current premium has something to do with their exposure to emerging markets. 

Diageo has just taken control of India’s largest spirit company, while Unilever is concentrating its efforts on driving growth within emerging markets. As the majority of the world’s population lives within emerging markets, Unilever and Diageo are set to see their sales rocket due to exposure to these vast, rapid growth markets. 

Investors should take advantage of emerging market growth. Indeed, as consumers within these markets become more affluent sales will start to expand across the board — something investors do not want to miss.