High tide

Low-growth consumer stocks are pushing the limit

Shares in Procter & Gamble, Diageo and Unilever, among other peers, trade at around 20 times next year's expected earnings. That's despite seeing low or no growth in their emerging and developed markets. The consumer stalwarts can thank yield-starved investors, who are chasing reliable dividend payers.

Beside near zero-yield sovereign bonds, it is easy to like the 3 per cent dividend yields on offer. But the stocks look expensive. Companies that command premium ratings usually do so because they are growing. But though the large global consumer companies are generally well run and soundly financed, they are having to run hard even to stand still. Fierce competition on supermarket shelves, stagnant spending by rich-country households and disappointing growth overseas mean most big companies in the sector are struggling to increase revenue.

Sales of Tide detergent, Gillette razors and other P&G household products rose a meagre 2 per cent during the three months ended in December, for example, once the effects of acquisitions, divestitures and foreign exchange swings were stripped out. Cost savings bolster earnings which, in P&G's case, grew 6 per cent last quarter, adjusted for special items and currency. But costs can't be cut forever. Unilever and Diageo are similarly challenged.

Why so pricey then? The answer may lie in the bond markets. With some of the world's biggest economies teetering on the brink of deflation after years of near-zero central bank rates, the yield on some countries' debt has sunk into negative territory. Investors desperate for better returns have options, one of which is to buy consumer staples companies for the dividend income.

One can see the attraction. While P&G might be finding growth hard to come by, predictable sales of its household staples have allowed it to increase its dividend for 58 years running. As long as bond yields stay low, the gulf between consumer companies' growth rates and trading multiples could linger or even grow wider. At some point, however, the rewards from even the most reliable dividend payers will fail to compensate for the risks inherent in all equity investment.