Management at Unilever (LSE: ULVR) is simplifying the company’s legal structure to make mergers and acquisitions easier. As a result, the firm will no longer be a part of a leading European stock index, the Euro Stoxx 50 benchmark.
Although leaving the index could cause some selling, Unilever shares are nevertheless up year-to-date. Given the stock’s performance in 2020, is ULVR still a bargain? Here’s what I think.
Earnings estimates
Based on earnings estimates, I don’t think Unilever shares are a huge bargain at current prices.
The world economy is expected to rebound rather strongly next year. However, things might not improve that much for Unilever in 2021. For full-year 2021, for instance, analysts expect the company’s underlying earnings per share to increase just 3.4% to €2.59. Given the company’s current stock price, ULVR trades for around 20 times 2021 earnings, which is about the same as fellow leading consumer staple company, Reckitt Benckiser.
Unilever shares: ‘defensive’ qualities
Although other stocks probably have more upside, I nevertheless think Unilever shares are still a good deal given the company’s qualities. To me, Unilever’s key quality is being a defensive stock that won’t fall as much in a recession as many other stocks.
I view ULVR as a defensive stock because the company has a collection of leading brands. According to a presentation in June, the company has 14 of the world’s top 50 global consumer brands, including Dove and Lipton. Given its leading brands, the consumer staple has substantial customer loyalty. This keeps its products moving in good times and bad.
Because Unilever’s products also don’t cost that much, demand for the company’s products is pretty steady in tough times in my view. The brand loyalty and relative inelasticity makes Unilever’s potential earnings more durable to me.
I also view ULVR as a defensive stock because the company has a strong balance sheet. That has allowed it to navigate the recent macroeconomic winds with ease so far. The company has a low gearing ratio, an A1/A+ credit rating, and around €11bn in cash and undrawn facilities. With its strong balance sheet, I believe management has plenty of financial resources for M&A, which could help the company grow earnings in the future.
In terms of performance as a defensive, I reckon ULVR has lived up to its role this year. Year-to-date, Unilever shares are actually up while the FTSE 100 is down around 16%.
I think the company has an attractive dividend
Another key quality that I like about Unilever shares is the company’s dividend.
Over the past five years, for example, Unilever’s dividend has been dependable as the quarterly dividend per share has increased from €0.302 in Q3 2015 to €0.4104 in Q3 2020. Given its fundamentals and market position, I believe ULVR will likely pay a dependable and growing dividend in the future as well.
In particular, I think Unilever’s earnings per share could really benefit as incomes in emerging markets grow in the long term. Unilever currently gets around 60% of its sales from emerging markets.
If the company’s earnings per share grow, I reckon its dividend could grow too.
As far as its qualities go, I’d buy and hold ULVR for the long term.
