Nick Train is one of the most popular fund managers in the UK. If you’d invested in the Lindsell Train Global Equity Fund when it launched in 2011, you’d have enjoyed returns in excess of 200%. His biggest holding in the global fund and its UK equivalent is the household consumer goods giant Unilever (LSE:ULVR).
Unilever: a fund manager’s dream?
Unilever says its brands are present in 98% of the households across the UK. Globally, its products are used by 2bn people every year. It owns popular brands such as Marmite, Sure, Dove, Persil and Magnum to name just a few. Regardless of the state of the economy, consumers will be buying Unilever products.
Brand loyalty is one reason why top fund managers are attracted to investing in a consumer goods business. It ensures that revenues are predictable as consumers don’t want to be without their favourite products. Consumers are also likely to pay a premium for these products, which is why they’re generally highly profitable businesses. Unilever makes an impressive 20% operating profit from revenues in excess of €50bn.
Unilever is on sale
As a consequence of these excellent fundamentals,the price-to-earnings ratio of Unilever is about 18, above the FTSE 100 average of 15. However, due to Unilever’s potential for earnings growth, fund managers will not be deterred in further investing when the share price weakens. And it has done just that.
The share price is currently 16% down from this time last year at circa 4,300p. Despite this, it has been resilient to the effects of the coronavirus, falling only 3% since the start of the year. This is in contrast to the FTSE 100, which has lost nearly 19% of its value.
Quality, not quantity
Despite the recent fall, shares in Unilever are not cheap in relation to other businesses on the FTSE 100. As I said, the current share price discount could be enticing enough for fund managers to increase their holdings. While the price is low, I’d be inclined to follow them. They’re more likely to make a seemingly solid investment like this, rather than take a chance on cheaper stocks. As Warren Buffett says: “It’s far better to buy a wonderful company at a fair price, than a fair company at a wonderful price”.
This quote is a great reminder that we should invest in a business because of its excellent fundamentals. Being cheap is not a good enough reason to invest in any company.
Excellent dividends
Another good reason to invest in shares of Unilever is to benefit from its quarterly dividend payments. Not many companies in the FTSE 100 make payments that often. I see this as an excellent perk as it provides the investor with a regular income stream, offering regular opportunities to reinvest further. The current yield is just over 3.5% and the payments are growing above the rate of inflation. The dividend is covered a healthy 1.5 times by profit.
Reinvesting quarterly dividends and profiting from any future share price recovery looks a savvy approach to me. I would also take comfort in knowing that when I buy, it’s highly likely one of the UK’s top fund managers will be doing exactly the same thing!
