It’s been a good year for many in the UK stock market, with the benchmark FTSE 100 index adding 19% over the past 12 months. But not all the index’s members have done that well. In fact, one blue-chip FTSE 100 share has shed more than the index has gained. Over the past year, its shares are down 20%.
Here’s why I see this as a buying opportunity for my portfolio.
Underperforming FTSE 100 share
The stock in question is Unilever (LSE: ULVR). The company is one of the giants of the consumer goods sector, owning brands such as Hellmann’s, Ben & Jerry’s and Lynx.
As an investor, I like the consumer goods business for several reasons. First, demand is likely to be fairly consistent. While ice cream may be a luxury, soap and laundry detergent are everyday necessities. Even in an economic downturn, most consumers will still buy them. As Unilever has brands at different price levels, even if shoppers switch to a cheaper brand, the company could still earn revenue.
Secondly, I like the pricing power that premium brands give a consumer goods company like Unilever. Its advertising and product development has helped to nurture customer loyalty over time. That can be helpful when it comes to passing on price increases to customers. That’s relevant right now, as one of the risks to the company’s performance is cost inflation. In July, the company warned that such inflation threatened its profitability this year. That helps explain the weak performance of the Unilever share price.
Why is the Unilever share price falling?
That isn’t the only risk facing the shares. The company has been a leading light among consumer products businesses regarding eco and ethical issues. But consumers’ increasing focus on sustainability and ‘doing the right thing’ could still impact it and at the very least will require heavy ongoing investment. That could threaten profits in coming years.
The company is also globally exposed, selling in most countries worldwide. While that can be good for business, it adds risks as international logistics costs are currently elevated. That too could hurt profits.
But while there are risks, do they merit marking down this well-established FTSE 100 share by a fifth in the space of a year? I don’t think so.
Why I’d buy Unilever for my portfolio
In my opinion, the selling has been overdone. Unilever shares now trade below the price at which legendary investor Warren Buffett offered to buy the company a few years ago. If I can buy a share of a company at a cheaper price than Buffett offered, I’m interested.
The company’s strong portfolio of brands and established sales network mean it has what Buffett calls a moat – something that helps defend it against competition. I think its moat could last for decades yet. Brands like Marmite simply don’t have a direct substitute. That helps keep customers loyal.
Meanwhile, the company is sharing the benefits of its strong cash flows with shareholders. The current Unilever share price offers a dividend yield of 3.9%. For a FTSE 100 share of this quality, I find that attractive. I’m considering adding Unilever to my portfolio.
