Unilever plc Shows Why It Should Be A Staple In Your Portfolio

While markets look down and dirty right now, Unilever plc (LON: ULVR) has cleaned up, says Harvey Jones

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If you’re looking for a stock to tough out today’s turbulence, try Unilever (LSE: ULVR) (NYSE: UL.US). While the FTSE 100 is down 4% over the past three months, Unilever is up a tasty 10%. This is no flash in the plan. Over five years, it is up 107%, against 64% for the index. This only underlines why this blue-chip stock should be a staple in your portfolio.

All consumer staple stocks, including tobacco, food and beverage producers, have performed well lately, boosted by last week’s positive IMF report, which hiked forecast UK from 2.4% to 2.9% this year. Current turbulence may even be working in Unilever’s favour, as investors dump risky and potentially overvalued technology stocks, amid talk of another bursting bubble. 

unileverTea And Noodles

Unilever is the antithesis of a tech start-up. But that doesn’t mean it lacks growth opportunities, given the near-unmissable bullseye of the emerging market consumer to aim at. This delivered impressive underlying sales growth of 8.4% last year, led by Russia, China, Turkey and Indonesia. That is double total group growth of 4.1%. Yes, emerging markets are troubled right now, but household goods offer defence against that. People still need to wash their hair, scrub their bathrooms, drink tea and eat Pot Noodles in a downturn.

That said, the company has been more successful at selling household goods to emerging markets than food, leading to speculation that it could sell off its food making division. In a bid to simplify its operation, Unilever has just offloaded its meat snacks business, including Peperami to US firm Jack Link’s Beef Jerky. We can expect more of this. Skippy peanut butter has gone, as has Culver Speciality Brands in the US, and the UK and Irish rights to cooking sauces Chicken Tonight and Ragu. This could end up in a leaner, faster-growing operation.

Cheap Is A Relative Concept

Unilever has also been helped by speculation that it may be returning cash to investors in the shape of a £4 billion share buyback. Shareholders are already getting handsome cash rewards, in the shape of Unilever’s 4.2% yield. When I’ve written about this stock in the past, it typically yielded around 3.2%. Now looks a good entry point for income seekers.

Although I’m praising Unilever’s defensive prowess, it has actually had a sticky year. Despite the recent share price improvement, today’s price of 2668p is still 7.5% below last May’s high of 2885p. That doesn’t exactly make Unilever cheap, but then, when has Unilever ever been cheap? I usually baulk at paying more than 15 times earnings for a stock, but Unilever trades at a meaty 19.5 times earnings. If you wait for a cheaper entry point, you could be waiting for years.

The market has already priced in this year’s disappointing earnings per share (EPS) forecasts, which projects predict a drop of 2%. It is looking at 2015, when EPS are forecast to rise a healthy 8%. If you believe the current emerging markets dip is a temporary setback, Unilever looks a good way to play the revival, from the relative safety of the FTSE 100. You should consider grabbing this rare buying opportunity while it lasts.

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.

Harvey doesn't own any shares mentioned in this article. The Motley Fool owns shares in Unilever.

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