With the S&P 500 up 23% over the past year, it has become more difficult to find reasonably valued stocks lately. However, it's still possible to find quality stocks at rational valuations. For instance, international consumer staples giant Unilever's (UL 0.34%) stock is down 15.3% in the last year.
Part of the reason for the drop was Unilever's recent failed attempt to finalize a deal that would help it buy its way into a new product category -- healthcare. Given Unilever's recent performance, should income investors give this stock a chance? Let's look at Unilever's fundamentals and valuation to try to answer that question.
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Unilever posted an impressive third quarter
Unilever delivered robust operating results in the third quarter, which builds on what has been a strong 2021 for the company. Before going over Unilever's operating results, it's worth highlighting the company's brand power to understand the key reason behind the positive operating results. As a testament to the strength of Unilever's more than 400 brands, the company's products are used by more than 2.5 billion people each day throughout more than 190 countries. These iconic brands include Ben & Jerry's ice cream, Axe deodorant and body spray, and Vaseline.
Unilever reported 13.5 billion euros in sales during the third quarter, which represents 2.5% growth over the year-ago period. While Unilever's sales volume declined 1.5% compared to the year-ago period, this was more than offset by the 4.1% underlying price growth that was passed to consumers to combat rising costs for the company. Aside from the price growth, another reason that sales volume marginally declined in the third quarter was that the company faced tough comps over the third quarter of 2020. These operating results are an encouraging reflection of how embedded Unilever's brands are in the lives of consumers around the world.
Unilever's solid third quarter resulted in 39.3 billion euros in revenue for the first nine months of the year, which is a 4.4% increase against the same time period in 2020. This is within the top half of the company's multi-year target of 3% to 5%, which demonstrates that the company is delivering on its promises to shareholders.
Because of Unilever's admirable execution, analysts are forecasting that the company will also generate 7% annual earnings per share (EPS) growth through the next five years.
Unilever has a decent balance sheet
Unilever is producing nice operating results for shareholders. But another reason to think about buying the stock is its financial condition.
Unilever's debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio of 2 is moderately lower than industry peer Kimberly-Clark's 2.3 debt-to-EBITDA ratio. But it's meaningfully higher than Procter & Gamble's (PG 0.86%) debt-to-EBITDA ratio of 1.1. This means that Unilever doesn't maintain the most conservative balance sheet in its industry, but the balance sheet isn't one of the weakest either. Simply put, Unilever's debt load appears to be reasonable for a company of its size and scale.
Unilever's payout is secure
Unilever is a financially healthy business. However, it's just as important to make sure that the stock maintains a sustainable dividend payout ratio. Fortunately, this seems to be the case for Unilever.
Unilever paid the equivalent of $2.03 in dividends per share in 2021. Weighed against the $2.84 in EPS that analysts are predicting for 2021, this works out to a dividend payout ratio of 71.5%. This is a manageable payout ratio, but I'd still like to see it a bit lower so Unilever can retain more capital to focus on growing the business. Given the high-single-digit annual earnings growth that analysts are expecting in the medium term, this should allow Unilever to grow its dividend in the mid-single digits annually to make the payout even safer over time. Paired with the stock's 4% dividend yield, this is an attractive combo of immediate income and growth potential for income investors.
A blue-chip stock to buy now
Overall, Unilever looks to be an above-average quality stock based on its prominent brands, fine balance sheet, and safe dividend. And considering Unilever's valuation, the stock looks to be a buy for income investors at this time.
This is because Unilever is trading at a forward P/E ratio of just 18. This is moderately lower than Procter & Gamble's forward P/E ratio of 25.2, which itself appears to be a great buy for this year.
