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LONDON -- If the long-run return on the market is 9.4% (as researchers at Credit Suisse say), investing in shares should be a no-brainer. Somehow, however, all too often our portfolios don't seem to reflect that attractive performance.
This is partly because that 9.4% number is an average derived from 100 years of data. Picking various time periods within that 100 years gives very different outcomes -- and the market almost never actually returns 9.4% in any single year.
Unless you're holding a market tracker, your portfolio could have dramatically different results from what the market experiences. If you own a disproportionate amount of winning shares, your returns could be significantly better than the market. On the other hand ...
Over the past decade, Unilever's performance has just edged out that of the FTSE 100, returning an average of 9.3% compared with 8.3% for the index.
Unilever's shares struggled through the first part of the decade, trailing the FTSE 100 until the global financial crisis evened things up. However, over the past two years, Unilever's shares have far outstripped the market, rising 35% compared to a more pedestrian 9% rise for the FTSE 100.
Despite its long period of underperformance, Unilever's shares have consistently traded for at a premium to the market in terms of price-to-earnings ratios. Part of this could be explained by the perceived reliability of the company's cash flows thanks to the oft-purchased nature of the company's consumer goods.
These healthy cash flows help support the company's dividend, which has grown an average of 6.8% annually since 2003. The yield isn't all that stunning currently, at just over 3%, but the strong rise in share price over the past two years is partially responsible.
The question investors need to ask is, "What does the future hold for Unilever?" Over the past several years, the company has wisely increased its exposure to the rapidly growing emerging markets of India, China, Turkey, and South Africa -- emerging markets made up 54% of sales last year -- as consumers in its more developed markets in the U.K., Europe, and the U.S. are struggling.
Will these developed-market consumers come back once their economies and disposable incomes recover (as they most likely will), or are we entering a new age of austerity where consumers are learning that store brands can deliver what they want at a lower price? Will trading down become a generational trend?
If this is the case, then Unilever will lose its vaunted pricing power -- its ability to raise prices even in times of economic hardship -- which could have dramatic negative implications for profitability and shareholder returns.
Large caps for the long run
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