Is the Unilever share price too cheap?

The Unilever share price continues to trade below pre-pandemic levels, despite a good underlying performance. Zaven Boyrazian takes a closer look.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The Unilever (LSE:ULVR) share price has had a rough ride in 2021. Despite an initial recovery from its decline in early 2020, the stock’s headed in a downward trajectory. And, in February, it reached its lowest point since 2018. Since then, it’s begun climbing again, but still remains firmly below pre-pandemic levels. So is this a buying opportunity for my portfolio?

The fluctuating Unilever share price

Despite Unilever’s share price performance, I think the business has done pretty well.

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This large consumer goods business owns a portfolio of 47 brands, covering a wide range of well-known products. These include Dove soap, Hellmann’s mayonnaise and, my personal favourite, Ben & Jerry’s ice cream. Needless to say, the business has a diverse collection of offerings for its customers. And these brands continued to maintain their popularity throughout the pandemic, especially its hygiene and personal care products, given the acute focus on Covid-combatting purchases.

Overall, it achieved a 1.9% growth in sales, despite consumer spending in the first half of last year falling considerably, according to the Office for National Statistics. While this is hardly stellar growth for a £100bn blue-chip consumer goods business, that’s quite an achievement, given the circumstances.

So why did the Unilever share price fall after publishing these results? Total sales may have met investor expectations, but underlying profit didn’t. Operating income fell by 5.8% as some of the company’s high-margin product sales volumes declined. For example, ice cream missed out on the 2020 summer season since lockdowns prevented most of us from enjoying the collective sun experience.

Looking ahead

Given that the decline in underlying profits was caused by external factors rather than a significant problem within the business, I’m not particularly concerned by the drop.

The vaccine rollout is progressing relatively quickly here in the UK. And providing infection rates don’t spike again, it looks  as if life will return to relative normality in time for the upcoming summer season.

What’s more, to protect the business’s financial health, the management team is focussing on building its cash position. Subsequently, it’s increased its free cash flow by €1.5bn to €7.7bn.

Impressive as this is, Unilever still has some tough competition to deal with. Afterall, the consumer goods market is filled with alternative brands. Both social media and digital marketing have also made it much easier for smaller companies to launch and steal market share from the likes of Unilever.

If the firm fails to maintain the pricing power of its brands, then its margins may get squeezed. This, in turn, would continue the decline in underlying profits that would subsequently lead to a fall in the Unilever share price.

The Unilever share price has its risks

The bottom line

Unilever is by no means a high-growth stock. However, it has consistently and reliably returned profits to shareholders through its dividend policy.

Given its track record and extensive collection of brands, I believe the business can continue to perform well for many years to come. Therefore, I think the recent decline in the Unilever share price is an opportunity to add the stock to my income portfolio.

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