Trading for less than $50 per share, Unilever (UL 0.19%) offers investors a generous 4%-plus dividend yield. That's likely enough to get dividend investors to take a closer look. What makes the stock a brilliant long-term buy is that management is in the middle of a turnaround effort that is likely to work out over time. Here are some key facts to consider.
Grasping at straws
Negative sentiment really came to a head here when news leaked in early 2022 that Unilever was looking to buy the over-the-counter drug business of GlaxoSmithKline. The stock plunged and management got the hint, eventually giving up the effort. The more important question, however, is: Why did the company consider this move?
Image source: Getty Images.
The answer is that the consumer staples giant was trying to find a way to boost growth -- something that Wall Street has been hoping it would do. An expensive acquisition that would load the company down with debt, however, wasn't the way investors wanted to see it happen. With an iconic stable of brands, including Dove, Ben & Jerry's, and Hellmann's, among many others, it seemed like there was ample opportunity to achieve growth through internal means.
Concurring with that assessment was activist investor Nelson Peltz, who famously got involved in a similar and successful turnaround effort at Procter & Gamble. Although Peltz wound up in a tense proxy fight with P&G before being added to its board, Unilever basically added him to the board as soon as it could. And he is reportedly very involved -- even rumored to be interviewing CEO candidates as the company looks to replace its retiring leader.
What's happening and why will it work?
So Unilever is working to grow faster and refresh its leadership ranks. Truly conservative dividend investors may want to sit on the sidelines until there's some progress to show. But if you are a bit of a contrarian, these actually are all positive early steps taking shape.
The company's willingness to work with Peltz is a clear example that it can think outside the box. And it has already implemented a global management restructuring that reduces complexity and better ties compensation to results. That's still relatively new, so it's too soon to see material results, but it is a clear move in the right direction.
Then there's the company's ability to raise prices in the face of rapid inflation. For example, in the first half of 2022, organic sales rose 8.1%. That was driven by material price hikes that were only modestly offset by reduced consumer demand. Basically, despite the big-picture negatives, Unilever's end customers are pretty loyal.
Also beneficial is the company's material exposure to emerging markets (nearly 60% of the business) where inflation is a more common fact of life and, thus, price hikes are more easily accepted. Notably, emerging markets have historically grown more quickly than mature markets, which is why the company is so focused on the space.
All this speaks to an even more important factor -- Unilever isn't an upstart company. It traces its history back to the mid-1800s. It has a massive market capitalization of more than $100 billion. Its balance sheet is investment-grade rated. And it owns some of the best-known brands in the world. It may not be growing as fast as Wall Street wants, but it isn't in a death spiral. The company has worked through hard times before and survived. There's no rush to turn things around here.
UL Dividend Yield data by YCharts
Even if there are some false starts, investors won't turn more positive until they get what they want out of management. Having Peltz on the board, meanwhile, gives Wall Street a direct line to the company's leaders, so they can't easily ignore shareholders' desires. That suggests that something will eventually click into place.
Tweaking things
The big takeaway here is that Unilever really isn't broken -- it just needs a tune-up. That's not going to be easy, given the scale of its business. But it's not impossible, and with a strong core of brands and loyal customers, there's likely to be plenty of time to get things right. In the meantime, contrarian investors can collect a generous 4%+ dividend yield, which is at the high end of the historical yield range. From a risk-reward standpoint, this looks like a strong choice for patient investors.
