One of the biggest attractions of globally diversified product companies such as Unilever (LSE: ULVR), Imperial Brands (LSE: IMB) and Diageo (LSE: DGE) is their ability to weather economic downturns with little pain to share prices while companies all around them sink deep into the red. Indeed, both during and since the worst of the Financial Crisis each of these three companies has handily outperformed both the S&P500 and FTSE100. The next recession could be years away from us, but can these three repeat their past outperformance?
Unilever’s key to weathering the last recession and any future recession is a relatively even exposure to both the developed and developing world. From 2007 to 2009, while wealthy economies were spiralling into recession, emerging markets were roaring on the back of the Chinese-led Commodity Supercycle.
And even as these developing economies’ performance now trends downwards, Unilever is still performing well in them due to its focus on high quality consumer goods that shoppers buy even when their paycheques are shrinking. In the past quarter, Unilever’s underlying sales in emerging markets rose a full 8.3% as volumes and prices rose.
This proven resilience in the midst of an emerging markets downturn, even though 57% of revenues now come from those markets, makes me confident Unilever will survive any future recession just fine. Shares may be pricey at 21 times forward earnings, but the company’s proven performance across economic cycles leads me to believe Unilever is still a share everyone should have on their watchlist.
Room to grow
The secret to Imperial Brand’s success lies in its former name: Imperial Tobacco. Despite decades of increased regulation and public health drives to stamp out smoking, Imperial shares recently climbed to record levels. This is because Imperial and other tobacco companies have been able to wring more revenue out of falling numbers of smokers. Over the past half year, volumes fell 3.1% yet tobacco revenue increased 15.4% and adjusted operating profits a staggering 19.8%.
Besides selling an addictive product, Imperial’s relative immunity to recessions is also thanks to its geographic reach. Decreased smoking in the developed world has been more than offset by the growing volume and wealth of customers in emerging markets. Investors on the outside looking in should be intrigued by shares trading at a relatively sedate 16 times forward earnings and coming with the added bonus of a safely-covered 4.1% yielding dividend.
Take a closer look
There are few items as recession-proof as alcohol, as people drink in both good and bad times alike. This axiom has served shareholders of Diageo well over the decades even if earnings have fallen the past two years as the company has divested non-core assets such as vineyards and a Scottish golf resort. The company has done this because, like Unilever and Imperial, it sees its future selling to the tens of millions of new members of the middle class across the developing world.
Diageo’s shift from North America and Europe to the emerging world has paid off as net sales rose in Africa, Asia and South America during the past six months. Sales increases in these developing markets helped offset stagnation in the wealthy world enough for adjusted operating profits to rise 2%. If Diageo can continue to pivot towards these growth markets and maintain 30%-plus operating margins, shares may be worth a closer look despite their 20 times forward P/E ratio.