During 2013, I’ve looked at most shares in the FTSE 100 and graded them against these five quality and value indicators:
- Dividend cover
- Borrowings
- Growth
- Price to earnings
- Outlook
Some companies scored highly against the “business quality” indicators of level of borrowings, earnings growth record, and outlook. Other shares scored highly against the “value” indicators of dividend cover and price-to-earnings ratio (P/E).
Quality and value in harmony
However, the most promising investment opportunities scored well on both business quality and value indicators.
In this mini-series, I’m revisiting some of the highest scoring shares to look at events since the original article and to assess the quality of the investment opportunity now. Some of these high-scoring firms could be investment winners for 2014 and beyond. So, today, I’m revisiting Unilever (LSE: ULVR) (NYSE: UL.US), which scored 19 out of 25 in March.
Sound progress in emerging markets
The recent third-quarter results showed that Unilever’s brand-fuelled revenues grew 4.4%, which includes an 8.8% advance in emerging markets. Last year, around 55% of turnover came from fast-growing emerging markets, so progress there is significant, particularly since the firm is not yet seeing an improvement in the stagnant market conditions in North America and Europe.
In July, Unilever upped its stake in Hindustan Unilever, its publicly-listed Indian subsidiary, to around 67%, thus confirming that the region is a strategic long-term priority for the firm. Such moves seem encouraging as Unilever focuses on the areas of its business that are performing best.
Valuation
Back in March, earnings covered the dividend around 1.7 times, net debt was about 1.2 times earnings, and there was a record of steady growth in revenue, earnings and cash flow. Trading was good and the outlook positive. None of those things has changed to affect the scoring on my business-quality indicators.
I scored Unilever two out of five on valuation, as the P/E seemed to look ahead of expected growth and yield. It still does now, so, despite an approximately 10% share-price slide since March, I’m keeping my overall score at 19 out of 25 for Unilever. It seems that analysts following the company have recently tweaked down their expectations for 2014’s earnings to about 6%, with an expected forward yield of 3.7%.
What now?
Unilever’s full-looking valuation seems to reflect the continuing steady growth and positive outlook. The firm scores well on my business-quality indicators and I’m tempted to buy the shares on the dips, using dividend yield as a guide.
