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