PZ Cussons is in many respects a mini-Unilever. It owns and manages a range of brands that incorporate personal care, home care, food, and beauty products. Weighing in with a market cap of only £1.5 billion, it is no more than a fly in the ointment for Unilever, but what it lacks in scale it can make up for with nimbleness and agility.
If I were to sit down and compile a checklist of what I look for in an investment, then PZ Cussons would probably tick every box. In fact, let’s do exactly that:
- Reliable Dividend
With its final results for the year to May 2015, PZ Cussons announced an increase in its dividend of 3.1%. According to the company, this is the 42nd consecutive year of dividend increases. When I think of dividend champions, I usually think of the Coca-Colas, General Mills, and P&Gs of this world, but it is worth bearing in mind that you do not need to be MegaCorp to be dependable. At its current price of 346p, PZ Cussons is currently yielding 2.3% and the next payment is due 1 October 2015. As the total 2015 payment (8p) is 2.2x covered by earnings, it also looks good for at least a few more years yet. - Growth Potential
One of the best thing about investing in PZC is the exposure it gives to emerging economies. Africa contributed nearly 44% of last year’s total revenue. Nigeria is the biggest market in Africa and it is also PZ Cussons’ strong suit, as the company initially began as an exporter of textiles and commodities there in the 19th century. Having long since switched to selling branded goods, PZ Cussons now controls, for example, 42% of the baby care market in Nigeria. With a population of 180 million and 42% of its population under 14 years of age, it is easy to see that the growth runway is long.Why would you need to pay 1.5% to an emerging market fund manager when you can own a real company that does the job directly? - Strong Brands
PZC sells different brands into different markets. Its best known products include Imperial Leather soap (my Grandparents always had a bar!) and shower gels, Carex hand wash, St Tropez spray tans (advertised by Kate Moss), Rafferty’s Garden baby foods, and Minerva (Greek olive oil and food business). This year, PZC nipped in with £5.4 in cash to pick up a Greek vinegar for the Minerva stable. Due to its relatively small size, strong balance sheet and good knowledge of its primary markets, hopefully PZC will be able to continue to move quickly to take advantages of opportunities such as this whenever and wherever they knock. - Good Return on Equity
With a Return on Capital Employed of 22.33%, PZC comfortably outperforms the average company in terms of profit generated on capital employed. While the outperformance isn’t huge (FTSE 100 companies average about 18%), give it a few years and the benefits will become apparent–since its original listing in the 1950s, when it had a capitalisation of about £1 million, Lord Lee notes that PZ Cussons’ market capitalisation has grown to the current £1.5 billion without shareholders having had to add any further capital. - Long-Term Mentality
One aspect of family-controlled businesses that I love, is that they tend to be run for the long-term, which usually means less risk and better strategy. PZ Cussons, controlled by the Zochonis family (the ‘Z’ in PZ), scores highly on both counts: its debt-to-equity ratio is 0.47 (Unilever 1.01) and its strategy of investing in Nigeria and Indonesia makes sense, given the potential growth in those markets. The more short-term result of embracing emerging markets is the volatility that stems from the inevitable currency fluctuations (such as Nigeria has seen over the last year) and occasional bouts of political instability, which will lead to lumpy profits. - International Exposure
I would be wary of investing in a company that focusses solely on one market. We live in a global world and to my mind earning profits in different currencies and from different political administrations is one of the best diversifiers of all. PZ Cussons is truly global in its culture and mind set and works hard to provide its different markets with relevant products–for example, in addition to its usual portfolio, its Haier Thermocool electricals division also holds the clear market leader position for providing refrigerators, freezers, and washing machines in Nigeria! - Reasonable Valuation
PZC is not cheap, selling at a P/E of 19, and its share price has bounced around (like its profits) without making any headway over the last five years. The flip side to this is that its customary premium to sector peers has gradually been eroded and so, if and when the situation in Nigeria settles down, there should be plenty of upside available.
Currently I have only about 2% of my portfolio in PZ Cussons, but it is a position that I plan to add to on an on-going basis. Maybe the company will eventually go from being a mini-Unilever to being another Unilever?! (We can all dream…)
Disclosure: Long PZC.
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.