This P/E Suggests Unilever plc Is A Hold

Unilever plc (LON:ULVR) oozes quality, but is it too expensive to buy, asks Roland Head?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100 has risen by more than 80% since it hit rock bottom in 2009, and bargains are getting harder to find.

I’m on the hunt for companies that still look cheap, based on their long-term earnings potential. To help me hunt down these bargains, I’m using a special version of the price to earnings ratio called the PE10, which is one of my favourite tools for value investing.

The PE10 compares the current share price with average earnings per share for the last ten years. This lets you see whether a company looks cheap compared to its long-term earnings.

Today, I’m going to take a look at the PE10 of consumer goods firm Unilever (LSE: ULVR) (NYSE: UL.US).

Is Unilever a buy?

Unilever’s share price has risen by 88% over the last five years, getting far ahead of the firm’s earnings, which have been fairly flat during the same period. 

The reason for this is simple — investors have been willing to pay a premium to get access to Unilever’s reliable, high quality and diversified earnings, which remained very resilient during the financial crisis and are generously shared through a quarterly dividend.

However, the downside of Unilever’s defensive quality is that its shares have become very expensive, as these P/E ratios show:

  Trailing
P/E
PE10
Unilever 20.3 23.4

Trading at a whopping 23 times the firm’s average earnings from the last ten years, Unilever’s shares look fully priced — especially given that the share price is also more than 20 times last year’s earnings.

However, even at this price, Unilever’s dividend remains a key attraction for investors. Although the firm’s historic yield of 3.0% is no better than the FTSE 100 average, Unilever’s dividend payout has risen by around 8% per year for the last few years, and was increased by 10.7% in the first quarter of this year. Assuming this payout is maintained for the remainder of the year, this means that Unilever offers a prospective yield of 3.3%.

As a Unilever shareholder myself, I plan to hold on to my shares and to add to my holding at some point in the future. However, given the firm’s current valuation, I’m in no rush to buy more, and am concentrating on adding to the more affordably-priced holdings in my portfolio.

Overall, I rate Unilever as a strong hold, especially if, like me, you are seeking a reliable long-term income.

Can you beat the market?

If you already own shares in Unilever, then I’d strongly recommend that you take a look at this special Motley Fool report. Newly updated for 2013, it contains details of top UK fund manager Neil Woodford’s eight largest holdings.

Mr. Woodford’s track record is impressive: if you’d invested £10,000 into his High Income fund in 1988, it would have been worth £193,000 at the end of 2012 — a 1,830% increase!

This special report is completely free, but availability is limited, so click here to download your copy immediately.

> Roland owns shares in Unilever. The Motley Fool has recommended Unilever.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »