China’s slowdown has wreaked havoc on a host of FTSE 100-listed stocks including BHP Billiton and Rio Tinto, BP and Royal Dutch Shell, HSBC Holdings and Standard Chartered, drinks giant Diageo and fashion chain Burberry Group. There are two notable exceptions, however. Two major global companies that bet big on the Chinese consumer. Two British-headquartered powerhouses that have defied the slippage suffered by other UK companies who sought their fortunes by heading East.
Household goods giants Reckitt Benckiser Group (LSE: RB) and Unilever (LSE: ULVR) appear to have survived the China meltdown relatively unscathed. Reckitt Benckiser is up almost 24% over the last year, while Unilever is up 13%. That would have investors purring at the best of times, but with the FTSE 100 back where it was 12 months ago it looks downright racy.
Cutting The French’s Mustard
The two companies have long been admired for their defensive capabilities, and this year they have shown exactly how useful that can be. Some consider these stocks overpriced, regularly trading at 20 times earnings or more, but as recent performance has shown, it is a price worth paying.
Reckitt Benckiser, which reports Q3 results on Wednesday, enjoyed like-for-like first-half revenue growth of 7%, shaking off the emerging market slowdown to perform well in India, the Middle East and Turkey. It also grew strongly in China, South Africa, Korea and Japan. Only Brazil, Thailand and Indonesia disappointed.
Where Dove Flies
Last week Unilever posted underlying sales growth of 5.7%, rising to an impressive 8.4% in emerging markets. China delivered double-digit growth, partly due to a soft comparator year, but also due to rapid growth in online sales, and a successful launch of Unilever’s Dove body wash formulation.
Unilever also enjoys more pricing power in emerging markets, with prices up 3.8% while pricing continued to decline in Europe.
Vim And Vigour
While the big FTSE 100 emerging market losers this year are oil, commodity and banking stocks, Western-branded household goods are still flying off the shelves.
Reckitt Benckiser and Unilever have brushed off the Chinese crackdown on luxury goods. Officials no longer dare lavish contacts with branded fizz and designer handbags, but still stock their bathrooms with Dettol, Harpic, Vaseline and Vim.
Power Prices
You have to put money on this success continuing, as China continues its ungainly transformation from an export-led growth model to a modern consumer society. That is bad news for oil and mining giants, but Reckitt Benckiser and Unilever should continue to clean up.
The problem is that both are pricey again. Reckitt Benckiser trades at 26 times earnings and Unilever at around 24 times earnings. Their dividends are relatively low at around 2.4%. Both stocks are once again living up to their reputation as solid, reliable but a little expensive. Still, with five-year returns of 85% and 65% respectively, against 11% on the FTSE 100, that looks like a price worth paying.