Friday, 19 December 2014

BUY: PZ Cussons--Consuming another Consumer Defensive

Price: 298.99
Shares: 170
Predicted annual dividend income: £13.99

On Friday I had something of a difficult day. It was my birthday and my girlfriend had a day off yet I was I was stuck to the computer flicking between windows. It wasn’t the football scores. It wasn’t some global news story. It was a series of Word documents … and the FTSE share index.

I was spending the whole day writing up several months of research which had to be finished by the weekend but the drop in the markets meant that a number of highly appealing stocks I had been on the look at for were dropping like flies. They really were. What is more, many of them were hitting my 4B (“Backward Bandwagon Bargain Buy”) price. As a result, my concentration was a little split between deep thinking on higher intellectual pursuits and shallow flicking on lower stock prices.

Not great I know. But it paid off. One of my favourite NIMP (Not In My Portfolio) stocks hit my target price.

What was it? PZ Cussons.

Many of you will already be familiar with PZ Cussons. Maybe you wake up to the tingling freshness of Original Source shower gels. Or perhaps you are often finding yourself waging a war against bacteria and that last 0.01% not dealt with by Carex hand soap. Whatever, it is likely you have come across them—or rather their products—at some point.

PZ Cussons has been about for some time. First founded in 1879 in Sierra Leone as Paterson Zochonis named after its operators it has grown—slowly but steadily—to become a FTSE 250 midcap with a market capitalisation of about £1.3 billion. Not bad.

Now I am not going to lie to you. PZ Cussons is not going to be the standout sexy stock in my portfolio. It was not a screaming bargain to many. Nor is its yield going to make you dividend whiskers tingle like a fresh dollop of Original Source minty shower gel. Nonetheless, this has been exciting me for some time.

So what really excites me about PZ Cussons? Well, first has to be the fact that it—unusually—has a Z in its name. Good start. However, really what it offers is a series of things I find tantalisingly exciting:

1.      A strong stable of growing, defensive consumer brands;
2.      Exposure and experience in some high growth markets;
3.      What appears to be intelligent acquisition and expansion plans;
4.      Very good fundamentals;
5.      Solid yet—most importantly—strongly growing dividend;

All in all this made PZ Cussons a wonderful company. However, before this it also had something else: a high price. Over the last five years it has held an average P/E ratio of about 21. If this was still present on predicted EPS for next year of 17.8p per share we should expect a share price of about 373.8p.

As a result, to be able to pick the shares up at a price of under 300p was always something that caught my attention. Indeed, the last time they were trading at this price was in September 2012.

Of course there is a reason for this price retreat and it is chiefly related to currency and trading challenges especially in their key heartland of Nigeria. However, this is, I believe, very much a short-term concern and soon things will return to business as usual.

What is more, recently the management has been making purchases and plans which will see it expand its operations and geographical reach. Both aspects are encouraging for the long-term future and growth of the company.

What about the numbers?

So how does this all come together in the numbers? Well, it seems that the analysts agree with my theory that short-term pain should be swiftly forgotten. For this year coming this is what they think the EPS and P/E ratio will look like.

P/E Ratio
Difference (%)

None of these figures look too stretched to me for a high-quality company such as PZ Cussons. What is more, they anticipate the rebound the year after to be able to more than compensate.

P/E Ratio
Difference (%)

This means they are predicting a growth rate of between 10 and 13% next year giving a rather nice PEG ratio of between 0.95 and 1.51. Not bad at all for a defensive consumer company like PZ Cussons.

The company is also not highly leveraged. It has a debt to equity ratio of 0.25 which is very reasonable.

How does it help my investment goals?

So how does PZ Cussons fit into my goals for the year? Well for 2014 it does not a great deal as it is so late in the year that it will not contribute anything to my dividend tally. However, otherwise it is quite useful.

With a Beta volatility rating of 0.52 it will help me to achieve a volatility for my whole portfolio of 0.85 or less for this year.

And what about the dividends? Well first of all PZ Cussons has an excellent record of over 40 years of increasing their dividends. What is more, it is consistently around the 7% which is set to continue for the next two years. This means that it is predicted that PZ Cussons will pay out 8.23p and 8.86p per share for this year and next. This would yield an—admittedly not overwhelmingly impressive—2.75% and 2.96% for the next two years.

However, it is not the high yield I admire with PZ Cussons but the consistent and high growth rate. Some of you may have noticed the shift towards a few more dividend growth stocks and this is another case of this.

What is more, this dividend growth even with faltering EPS growth this year looks pretty certain due to a solid dividend cover. Indeed, even with the figures offered above it should be covered well over twice by earnings for the next two years.

As a result, although the dividend yield may not add a lot to my investment goals in the short term I expect PZ Cussons will be a star performer for my long-term investment goals.

Overall, I am very happy with my addition of PZ Cussons. Indeed, if when I next get some investing cash to go the markets way it is still hovering around the 300p mark I will likely top up my holding.

[Creative commons image reproduced from Flickr user Mathew Wilson]

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