(09/24/13) Consumer Giants from Europe

Although European equities are generally cheaper than ours, Europe's rebound likely will be modest and prolonged. As a result, we advise a conservative approach, advises Philip Springer of Personal Finance.

First, focus on companies with strong global franchises that will benefit from European improvement without overdependence on that outcome.

Second, seek reasonably valued, lower-volatility stocks that pay good dividends, to dampen your investment risk.

If Europe's economic recovery continues, companies providing consumer goods there should be among the first to benefit.

Growth Portfolio holding Diageo (DEO) is the world's largest producer of premium spirits and offers numerous wine and beer brands, with total annual sales of $18 billion.

Leading Diageo brands include Johnnie Walker, Crown Royal, J&B, Buchanan's, Windsor, and Bushmills whiskies, Smirnoff, Cîroc and Ketel One vodkas, Captain Morgan, Baileys, Jose Cuervo, Tanqueray, and Guinness.

North America is London-based Diageo's largest market (33% of sales), followed by Western Europe (19%) and Asia Pacific (15%).

Emerging markets account for 40%+ of revenues, heading toward 50% as the company increasingly looks to Asia, Africa, and Latin America for growth.

Western European results have been hampered by the weak economy, so they'll improve with any economic upturn.

Diageo is doing well overall. Earnings per share (EPS) rose 12% in fiscal 2013 (through June). We expect EPS to hit $7 in the current year, for a price-to-earnings (P/E) ratio of under 18.

We consider this an attractive valuation for a dominant global franchise. Annual dividend growth has averaged 6.7% over the last five years. Current yield: 2.3%. Another strong global consumer company is Unilever NV (UN). With $67 billion in annual sales, it has two primary operations: household/personal care (53% of revenues) and packaged foods (47%). Its 400+ brands in 180 countries include Lipton, Knorr, Dove, Hellmann's, Axe, Surf, and Ben & Jerry's.

Unilever faces formidable global competition from the likes of Procter & Gamble, Colgate, L'Oreal, and Nestle. But Unilever has more than held its own under CEO Paul Polman.

Its brand power has enabled the company to both raise prices and increase unit volume in many cases.

While maintaining a significant European presence, Unilever increasingly is focusing on emerging markets (currently 55% of revenues), where it has operated for many decades. Between new investment and sales of some food brands, the company also is emphasizing its higher-margin personal care segment.

Environmental sustainability is a core corporate value. So are increased efficiency, and simplification of global supply and manufacturing chains.

Brands, cost-cutting, and a growth focus, should enable Unilever to grow earnings at an annual rate of 8% or more over the next few years.

With the stock down 11% from its peak and yielding 3.4%, a P/E multiple under 18 represents good value now. We recommend that you buy Unilever for conservative growth and income.

We note that Unilever trades in the US as both Netherlands-based Unilever NV (UN) and UK-based Unilever PLC (LSS:ULVR).

Unilever NV tends to trade at a lower price, likely because the Netherlands withholds 15% of dividends for tax while the UK doesn't. However, you can apply a credit against US taxes that usually (but not always) fully offsets foreign taxes.