One to watach: Unilever

Published on Thursday 20 November 2008 21:17

Unilever 1,446p -35p Scotsman says BUY

DURING a recession there are some things (Lamborghinis, Swiss watches, M&S ready meals) that consumers stop buying – and some things (mayonnaise, cleaning products, soap) that they don't. Unilever's products belong almost exclusively to the second category.

Brands such as Domestos, Bovril and Cif may not set the pulse racing, but demand for them is reliable. And Unilever has been successful in passing on commodity cost increases to consumers of these brands.

Unilever is globally diversified – 45 per cent of its sales are to developing and emerging markets. This means that only about 10 per cent of its revenues are sterling-denominated. Given the weakening pound, that's good news.

It isn't, however, Unilever's dowdy-but-dependable product range or its global presence that prompts our interest. The real attraction is its financial strength. It is hard to find a company that comes close.

Spreads on credit default swaps tell us something very interesting about Unilever. At just 70 basis points, the modest cost of insuring Unilever's credit indicates that it as about as likely to default on debt repayments as the UK government, and less likely to default than the governments of Ireland or Spain. Ratings agencies seem to agree with the credit market.

Why does this financial strength matter so much? It matters because the credit crisis is flushing out financially distressed stocks. Because their weaker competitors will either shrink or go out of business, high-quality companies should actually benefit from the economic downturn. To the survivors go the spoils – and the Swiss watches.

&#149 The value of your investment could fall and you may get back less than you invested. You should take professional advice if you have any doubt about the suitability of this company for your portfolio.