When asked what type of investor I am, I reply that I’m an old-school value, income and dividend investor. And the undervalued, dividend-paying stocks I buy are usually found within the elite FTSE 100 index.
Two mega-stocks I don’t own
Earlier, when screening for cheap shares, I spotted two mega-cap stocks — that is, shares in very large businesses — I don’t own. Here are these two whales:
| Company | Sector | Market value | Share price | One-year change | Five-year change |
| Unilever | Consumer goods | £102.8bn | 4,056.5p | +9.5% | -2.2% |
| Diageo | Alcohol/beverages | £75.8bn | 3,372.5p | -6.9% | +22.1% |
Both of these British businesses are leaders in their fields, with even the smaller worth over £75bn. Yet Unilever (LSE: ULVR) has seen its shares decline over five years. However, these figures exclude cash dividends, which are substantial from both firms.
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So is it time for me to go big-game hunting?
Why don’t I own Unilever?
Oddly enough, I asked myself why I don’t own Unilever a fortnight ago. I’ve long admired the business, its hugely popular brands and its management team. So why not buy a stake in this storied firm?
On Friday, the share price closed 9.5% below its 52-week high of 4,483.25p, set on 28 April. So it’s below its 2023 peak, which I like.
Turning to fundamentals, it trades on a price-to-earnings ratio of 15.8, producing an earnings yield of 6.3%. Although this is more ‘expensive’ than the wider FTSE 100, my hero Warren Buffett has taught me that it’s worth paying a higher price for premium products.
Meanwhile, Unilever’s dividend yield of 3.7% a year is bang in line with the Footsie’s yearly cash yield. But Unilever has a decades-long record of delivering superior dividend growth over time.
That said, share prices don’t move in straight lines — and Unilever peaked above £52 in August 2019. Also, falling disposable incomes have put pressure on household budgets, leading some consumers to switch to cheaper brands and hitting this group’s earnings growth.
Even so, I have added this stock to my watchlist to buy when a lump sum arrives in July.
Why not buy Diageo?
Diageo (LSE: DGE) shares have taken a bit of a beating since late April. Indeed, at Friday’s close, the stock stood just 1.4% above its 52-week low of 3,326.5p, hit on Thursday (1 June).
As a bargain hunter, I’m naturally drawn to ‘fallen angels’ — great businesses whose shares are temporarily weaker or depressed. Right now, it trades on a price-to-earnings ratio of 21.6, for an earnings yield of 4.6%. Again, like Unilever, the share trades at a premium to the wider FTSE 100.
And while Diageo’s dividend yield of 2.3% a year is much lower than the Footsie’s yearly cash yield of 3.7%, the payout is covered twice by earnings. That’s a solid margin of safety.
In short, while Diageo’s shares are more expensive than Unilever’s, I’m drawn to them for the same reasons: great leadership, popular products and market strength.
Yet the group faces similar headwinds to its bigger British cousin — namely, tighter consumer spending, slower global growth, and earnings pressure.
Nevertheless, I have added this FTSE 100 stock to my watchlist to buy later this year. The only reason why I have yet to buy both stocks today is a lack of ready cash. But I intend to buy them next month, when the opportunity presents itself. And I aim to hold them for years and even decades.
