Is Now the Time to Top Up Unilever?

LONDON -- After a company announces its results, it's often good practice to let the dust settle a little before weighing up if it's a buy. So with the reaction to the latest quarter's results from Unilever  (LSE: ULVR.L  ) (NYSE: UL  ) now firmly baked in to the price, it's a good time for investors to review their existing shareholding in the company, in order to see if topping up makes sense.

Unilever, of course, needs little introduction. With more than 400 brands focused on food, health and well-being, the company boasts that no other business touches so many people's lives in so many different ways. Its portfolio ranges from nutritionally balanced foods to indulgent ice creams, affordable soaps, luxurious shampoos and everyday household care products, and includes world-leading brands such as Lipton, Knorr, Dove, Axe, Hellmann's, and Omo.

But when considering topping up a share, it's important to approach the question objectively. It's all too easy to place too much reliance on the popular perception of a company, read the Internet bulletin board chatter, and over-react to recent news flow -- especially if that has been accompanied by sharp movements in the share price.

So what questions should an investor consider?

Just the facts
I like to approach the issue by posing myself two sets of questions. The first set relate to the company, its business model and the latest results.

  • Is the original investment thesis still valid?
  • Have today's results materially changed anything in that thesis?
  • Is the share significantly cheaper -- or more expensive -- than when first bought?
  • Is the share "cheap" in terms of price-to-earnings (P/E) ratio or other yardsticks?
  • How are other investors likely to react to today's news?
  • Does today's share price represent a potential pricing anomaly that is likely to be short-lived?

My second set of questions relates to the weakest link in any investment scenario -- the investor themselves.

"Confirmation bias," as the experts put it, is when you look at the evidence, but only see the evidence that you want to see.

  • How much riskier is the share than when I bought it?
  • What could go wrong?
  • What don't I know about this company?
  • What sort of track record do I have in making these decisions?

Solid progress
Not so long ago, Unilever was attracting some of the headlines now popping up against stories about Procter & Gamble.

Investors, in short, were worried about the company's sprawling collection of brands, over-reliance on certain categories and markets, and lack of pricing power in terms of the supermarket majors. No longer: over two years, Unilever's share price has grown twice as much as the rise in the FTSE 100 (UKX).

And it was certainly difficult to quibble with second quarter results, out a few weeks ago.

Turnover was up 11.5% at 25.4 billion euros, with first-half underlying sales rising 7.0% -- comprising volume growth of 2.8% and price growth of 4.1%. Second-quarter underlying sales growth increased 5.8%, with core earnings per share up 6% at 0.76 euros, and free cash flow at 1.5 billion euros.

"Despite deteriorating global economic conditions and a competitive environment which remains intense, we again delivered volume growth ahead of our markets and gained value share across the majority of our business. Our performance reflects continued investment in innovation, brand-building and people, whilst keeping discipline on both costs and execution,” summed-up chief executive officer Paul Polman.

Clearly, despite a dip in the recession, Unilever is a strong and resilient business, and with strongly rising sales, profits and dividends over a five-year period, I'm not concerned. Trading at 2,288 pence today, Unilever has delivered 5% dividend growth per annum over four years, which is a pretty decent performance given the markets it is in -- although earnings, it's fair to say, haven't risen by as much.

But a bigger concern is the fairly lofty P/E attached to those earnings. While offering a FTSE-average 3.6% forecast yield, Unilever shares are rated at a distinctly premium forecast P/E of 17 -- and have been higher.

In short, I won't be topping up my stake in the company any time soon.

 

Year ending Dec. 31, 2007

Year ending Dec. 31, 2008

Year ending Dec. 31, 2009

Year ending Dec. 31, 2010

Year ending Dec. 31, 2011

Revenues (in euros) 40.2 billion 40.5 billion 39.8 billion 44.3 billion 46.5 billion
Pre-tax profit (in euros) 5.2 billion 7.1 billion 4.9 billion 6.1 billion 6.2 billion
Earnings per share 132 143 121 141 146
Dividend per share 75 77 42 82 90

Follow the money
One investor who takes a close look at valuations is Warren Buffett, whose Berkshire Hathaway investment vehicle has delivered returns of more than 20% per annum since 1965, and turned Buffett himself into the world's third-wealthiest person.

As it happens, earlier this year Buffett chose weak results and a dip in the share price to top-up his holding in one particular FTSE 100 share -- an unusual move for an investor who rarely ventures outside the United States. As a result, he now owns over 5% of this company.

Its name? Simply download this free special report from The Motley Fool -- “The One UK Share Warren Buffett Loves” -- to find out. Inside, you'll discover just why Buffett has invested over 1 billion pounds in this business, and why you could consider taking a stake too.

Underperforming the FTSE by 20% in the six months to mid-July, the company trades on a prospective P/E of 9.3 -- well below the FTSE 100 average -- and offers a tasty 4.8% forecast yield. As I say, the report is free, and can be in your inbox in seconds.

Are you looking to profit as a long-term investor? "10 Steps To Making A Million In The Market" is the latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- while it's still free and available.

More investing ideas from Malcolm Wheatley:

Malcolm Wheatley owns shares in Unilever, but not in any other company mentioned here. The Motley Fool has a disclosure policy.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2032859, ~/Articles/ArticleHandler.aspx, 10/20/2014 7:32:10 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement