Produced by Filip Fortuna. Filmed by Rod Fitzgerald.
Ask equity investors what they look for in a stock, and a common reply is growth at a reasonable price. But what they are increasingly buying is no growth at an unreasonable price Unilever, the maker of Dove soap and Ben and Jerry's ice cream, on Thursday reported sluggish revenue growth. Unilever's underlying sales averaged across the preceding four quarters, show a clear trend. And Unilever is far from alone.
Nestle, Reckitt Benckiser, and peers in the United States face exactly the same problem. And yet their price earnings multiples are close to multi-year highs. Why are investors paying more money to get slower growth? Well partly it's because profits are still rising, even if sales are moribund. All these companies are cutting costs, and egged on by activist investors, gearing up their balance sheets to boost their returns.
But this cannot last forever. All the big consumer goods companies acknowledge that they need to refresh their brands, selling slower-growth businesses and buying more zeitgeisty ones, often involving organic or health-food brands. But the question is how to do this.
Big deals, like Danone's $12 billion takeover of White Wave last year, are often criticised for being too expensive. But smaller deals don't have that much impact on such large companies. These groups aren't going to disappear. Their financial strength and their reliable dividends mean they are still worthy investments, especially compared to bonds, which in some ways they do resemble. But until they can figure out how to get sales growing again, do not expect their valuations to keep on expanding.