Unilever's (UL -0.51%) stock has risen more than 10% over the past three months, but the shares are still down by over 20% since hitting a high-water mark in 2019. So the problems that have been a drag on the company's stock predate the coronavirus pandemic. Here's a look at what's going on and why investors may want to buy the stock anyway.
Changes galore
Alan Jope was introduced as Unilever's new CEO in early 2019. At that point, the company had a business structure in which it simultaneously called two different countries home. This oddity made tracking the stock and its financials far more complicated than almost all of its closest peers. Jope helped to switch the company to operate out of the U.K. in 2020, making it much easier for investors to get a handle on its financials.
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Along with this big-picture change, Unilever was working on its product lineup, trying to shift out of slower growth categories and into ones with more long-term appeal. For example, the company agreed to sell its tea business in late 2021. Meanwhile, in late 2020 it agreed to buy Liquid IV, a maker of electrolyte drinks. And in early 2019, it added The Laundress, an eco-friendly cleaning business, to the fold.
Still, the company's performance had been somewhat stagnant for a number of years. Revenue, for example, has generally been trending lower over much of the past decade. Selling mature businesses and buying smaller, growing ones was part of the issue. But the bigger worry among investors was that Unilever had simply lost its way, leading to a broad pullback from the consumer staples giant.
It didn't help that Jope made a failed attempt to buy the consumer healthcare division of GlaxoSmithKline in early 2022. Investors were deeply negative about the deal because it would have materially weakened Unilever's balance sheet.
Is there any good news?
On the whole, that backstory is not a happy one, so it is understandable that investors remain fairly downbeat about the stock. However, with a well-above-market dividend yield of 3.5%, which is toward the high side of the company's historical yield range, there's a reason to take a deeper dive here. Basically, Unilever looks historically cheap.
The good news is that Unilever has been through tough times before in its incredibly long history, which dates back to the mid-1800s. And given the impressive brands it owns, including names like Dove, Ben & Jerry's, and Hellmann's, it has a very strong foundation from which to build a brighter future. Simply put, there's no particular reason to think Unilever is going anywhere.
Meanwhile, the company has a fundamentally different position than many of its closest peers, with roughly 60% of revenue coming from emerging markets. Growth in such countries can be volatile, but over the long term, that growth is expected to be faster than in mature markets. And the company is working on streamlining its operations to reduce costs and improve performance, at least partly by focusing on the company's most important brands and markets. This is similar to the approach that helped Procter & Gamble turn its business around.
The company's third-quarter 2022 financial results, meanwhile, suggest that Unilever could be turning a corner. Notably, it has been able to increase prices to combat inflation without seeing a material decline in demand for its products. That could change as consumers get weary of price hikes, but the fact that high inflation rates are fairly common in emerging markets is a notable advantage for Unilever.
The key here is that the story isn't all bad and seems to be at least stabilizing as management works right the ship. The 10% stock price advance over the past few months is likely a sign that investors appreciate the improvements taking shape. Notably, the price move out-distances that of peer Procter & Gamble, the S&P 500 Index, and the average consumer staples stock, using Consumer Staples Select Sector SPDR ETF as a proxy.
The benefit of the doubt
Unilever is a global giant with highly desirable and competitive brands. Sometimes, older businesses like this ossify and need a kick to back on track. That appears to be what's happening right now, and given its incredibly long history, investors should probably assume that Unilever will figure out how to deal with its internal problems, even if the process is slow and drawn out. In the meantime, there's the generous dividend yield to collect while you wait.
There's no telling what the future holds, but the risk/reward trade-off with Unilever seems tilted in favor of long-term-minded dividend investors.
