Tuesday, 24 November 2015

BUY: PZ Cussons--Cleaning Up with Cleaning Products (and Other Consumer Goods)?

Price: 303.7
Shares: 226
Predicted annual dividend income: £20 (this purchase) and £54 (entire holding)

After my sale of SSE earlier this month, I had some excess funds to push the markets way.

I had several leading thoughts as to what it should be used for:
  1. Top up my position in life insurer Old Mutual;
  2. Open a new position in pub-operator and brewer, Greene King;
  3. Look for another defensive investment (to replace a utility) either already in my portfolio or new.
In the end, fortune made option three my choice. Around the time I was pondering on my next move, one of my favourite consumer defensives went down to my target purchase price again: PZ Cussons. 

PZ Cussons is a FTSE 250 consumer goods maker and I only topped up on it in September when--again--it was around my 300p per share target price.

PZ Cussons is now my third-largest holding (ed: it is now my second largest as it swiftly rose over 4% putting it ahead of Unilever) and has a much lower yield (and higher PE) than SSE.

So why did I decide to go with it?

Why PZ Cussons?

Such is the proximity of my last purchase to this. I will chiefly recall what I said about who they were here:
They are a mid-cap consumer goods company. they own a variety of pretty familiar brands. For those in the UK you no doubt known Imperial Leather, Original Source, St Tropez, Morning Fresh and--of course--the eponymous Cussons brand.
But they go beyond that. They have baby food (Rafferty's Garden), yoghurt (five:am) and detergent (Radiant) in Australia. And, in their biggest single market, they have a variety of products out there. Cooking oil (Mamador), detergent (Zip), cold ointment (Robb) and much more besides.
Whenever I think about the investing mantra "buy what you know" PZ Cussons is invariably one that comes to mind. I use Imperial Leather, Carex, and Original Source pretty much daily and Morning Fresh is a washing-up liquid I often purchase.
Undoubtedly they are a smaller consumer goods company, yes. They have a market cap of about £1.25 billion which when set aside Unilever's £79 billion seems minuscule. But don't let that lead you to thinking they are small. They have big brands in big growth areas and as a result of their size, plenty of space to grow.
So why did I add to the position again? Well after opening the position in December 2014 and then topping up in September 2015 my reasons are exactly the same: at c.300p again they are--in my mind--too cheap to overlook for the long-term investor.

But why are they back near their 52-week low price which is so tantalising. Again, I can't do better than quote my past self:
Well, partly because of the general market uneasiness. However, there are also some PZ Cussons specific worries.
Several of its geographical areas of focus are facing issues related to commodity pricing. Nigeria, Indonesia and Australia are all quite susceptible to low oil and commodity prices which--of course--we currently have.
In reality, these matters don't really concern me. They are a high-quality operation which has pulled growth out of the bag in previously equally unhealthy economic environments.
Interestingly, they are also still a family-run business with the current CEO--Alex Kanellis--being a great nephew of one of the founders George Zochonis. I am a fan of family-run businesses. They tend to have a much more long-term investing horizon seeing themselves more as stewards of the company. For a long-term investor, that is very attractive.
So there it is. But let's look at the actual numbers, shall we?

Good Relative Value

When PZ Cussons is not thrust back down to the c.300p mark they have tended to trade at a more familiar PE ratio of about 20 times. For those of you shopping around at consumer goods companies this high PE is no doubt very familiar.

At that price, I hardly think a quality operation like this can be deemed as "overpriced." This is especially true as the historic average PE for the last 5 years has been a PE of 23.

EPSP/E Ratio
Difference (%)13.60

Since my September purchase we have seen the estimates sharpen up a little (the difference between the highest and lowest estimates was 16% then). Thanks to my slightly higher price paid this time round the consensus PE is a little higher at 16.55 rather than 16.29.

For me, this is very good value. What is more, growth is anticipated to accelerate again from next year:

EPSP/E Ratio
Difference (%)23.58

Again, estimates have sharpened up a little with the difference being 25% in September. Overall, again, the company just looks too cheap around the 300p mark. A prospective PE around the 15/16 mark for a high-quality, defensive earnings consumer company like PZ Cussons is too tempting at that price.


Again, PZ Cussons really shines in the dividend stakes. 42 years of unbroken dividend growth is hard to beat. Once again, I have to return to my September self:
In other words, since 1973 they have increased their dividend every year. What is amazing about that is that I was born in 1987. That means that before I was even born they had already racked up 14 years of dividend growth (an excellent record already).
What is more, an average of 5% growth is expected this year and next to throw out dividends of 8.35p and 8.92p which would be yields of 2.75% and 2.94%. Hardly world-beating, I will admit. But they are well covered at about 2.2 times earnings (that is, a payout ratio of just 45%).  

All in all, a solid, secure and admirable dividend backed by a great management team. Hard to argue against.

Other Numbers

Other important numbers hardly look challenging either. The debt-to-equity ratio runs at a lowly 0.47 (well below the 1 mark when I start to worry about a debt threat). 

Yes, the recent annual report shows that debt has grown noticeably since 2011 from £48 million to £213 million. However, this has been to pay for acquisitions which have--to my mind--been solid moves and highly accretive to earnings and growth. With strong cash flow and a good cash reserve on hand (about £48 million, or 11.2p per share) I have no worries here.

PZ Cussons and My Goals

As before, PZ Cussons does quite well with regards my investing goals for the year

As a consumer defensive company it has a lowly beta value of 0.68. As such, in volatile markets I should see PZ Cussons performing well at keeping my portfolio volatility down.

Being a bigger purchase, it will also help towards my fees target of 1.35% or less for the year. All told, fees amounted to 1.19% of my total investment amount. That is nicely under my target and leaves me well set to easily beat my goal for the year.

Regarding my dividend income targets it is less helpful. I won't receive any additional dividends this calendar year as all payments have already been made. Next year it will start contributing, however.

Certainly, the more modest yield than SSE (which it replaces) will affect my predicted income for next year.

SSE was set to yield me about £37 over the year. In contrast, this new holding (which also includes extra cash from recent dividend payments from other holdings) will throw off about half of that much (about £20).

Not great, maybe, but I feel much more confident about the company's earnings and dividend growth in the future.

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[Creative Commons image reproduced from Flickr user Mathew Wilson]


  1. Good write up. It's definitely a good company and one that I would be happy to own. The price isn't quite there for me although I certainly don't think it's expensive at 300p.

    Best of luck with it.


    1. Thanks, John.

      I like it a lot at around 300p. In terms of management team and intelligent growth plans I find it perhaps the most attractive company in the FTSE 350. I really do.

      What price do you think is your ideal entry point? Be fascinated to hear.

      I'd love to see the stock nicely under 300p when I have free capital but as yet it has not really happened. It usually gets to around 300p then bounces back sharply (or at least has since 2010)!

  2. I'm also enamoured by PZ Cussons, and like John also haven't pulled the trigger on it yet. Am waiting for the 275-290 pence range before I shoot! Fantastic company though, to be honest I'd be proud to own it at 300p or less, but you know me and my cheapskate criteria are pushing me towards a PE of <15

    1. I know what you mean, M.

      Would have been nice to see PZC at around the 275-290 range. I think it dipped down there in September (which I missed, opened a position at 298 in December). I am not sure how likely (bar any major crises, of course) that it will get down to the 275 mark.The last time it reached that price it seems was in 2010!

      I am happy to keep topping up each time it drops to 300p and I have spare cash. Though I am about full on PZ Cussons for now despite its quality!

  3. Never heard of this company but I do love the consumer staples a lot. It's my largest sector overall. The numbers look really good for this company and as you stated you are probably right in being comfortable with its current dividend and future prospects for growth.

    1. They do not have a very large exposure in the US. That being said, there is an ADR (PZCUY) so if you were interested it would be straightforward to open a position.

      Consumer staples are by far the largest sector of mine as well. They have all the qualities that I find attractive!