Regardless of macroeconomic trends, I can’t find a single reason why companies such as SABMiller (LSE: SAB) and Unilever (LSE: ULVR) could not deliver 20% pre-tax annual returns, excluding dividends, for the next five to ten years.
With these two, the high yield and even modest growth will help you minimise the risk embedded in your portfolio. Of course, I’d hold stocks as part of a properly diversified portfolio, including multi-currency bonds, into 2020/2025.
NEXT and Whitbread could fare even better, although both retailers present a higher risk profile, and as such you may opt to reduce exposure to both names at this point in time.Â
SABMiller: A Premium Investment
In the last ten years, SAB shareholders have recorded a +336% performance, excluding dividends. Its projected yield stands above 2% into 2017, and looks sustainable. Brewers tend to churn out cash in any kind of environment, as proved by SAB’s performance all the way through the credit crisis. The brewer has actively managed its assets base over the years, and will continue to do so, which is a plus.
Its balance sheet is efficient, and net leverage is expected to drop below 2x in the next 24 months, which will leave management plenty of options with regard to cash returns to shareholders and/or other extraordinary corporate activities such as acquisitions.
If anything, after it acquired Foster’s — the last public brewer in world of a certain size — for $10 billion in 2011, SAB may have to find alternative ways to deliver value to its shareholders, and that could be a headache, given that investors are not inclined to bet on organic growth in emerging markets right now. Long-term trends are reassuring, however.Â
Historically, SAB shares have traded at a 5% premium vs the sector. At 23x forward earnings, they may look a bit expensive, but fundamentals still point to plenty of long-term value. SAB currently trades in line with the average price target from brokers, but I reckon investors will continue to pay up for SAB’s high-quality earnings. After all, this is a defensive business, whose balance sheet will soon scream for leverage.Â
Unilever: When Expensive Doesn’t Mean Much
In the last ten years, Unilever stock has risen by 150%, outperforming the FTSE 100 by more than 100 percentage points, excluding dividends. Its dividend yield is forecast at well above 3% in the next couple of years. By the  very nature of Unilever’s business, core profitability is lower than that of SAB. Its net leverage is much lower, too, at about 1x, which signals plenty of room for shareholder-friendly activity going forward.
The shares trade at 20x forward earnings, a relative valuation that could appreciate faster in the next decade. Unilever’s exposure to emerging markets is one element I like, and offers a competitive advantage: brand power and a massive infrastructure network will allow Unilever to strike key strategic partnerships in fast-growing emerging markets, where long-term trends remain incredibly favorable.Â
Its cash pile could grow at a faster pace: in fact, I wouldn’t be surprised if it announced the sale of its foods unit to a US-based rival by 2020, in a move that would likely shore up Unilever stock above the £30/£33 mark, given that it would enhance its growth prospects, while freeing up capital. Asset swaps should not be ruled out, either.Â
Finally, another element I like is the management team. Since Paul Polman was appointed CEO on 1Â January 2009, the shares have risen by 82%, outperforming the market by 30 percentage points.