It was a turbulent time for shareholders of Unilever (LSE: ULVR) last week. The stock was down over 10% at one point as the company announced it was interested in buying GlaxoSmithKline’s (GSK) Consumer Healthcare division for £50bn. The share price did recover somewhat to end the week down almost 7% after the approach went nowhere. This prompted Terry Smith – fund manager of Fundsmith Equity – to claim it was a “near death” experience for Unilever. Wow! But if Terry Smith is right, is there now value in Unilever stock? And is it time for me to buy? Let’s take a closer look.
Terry Smith’s assessment of the GSK bid
Fundsmith is a major shareholder of Unilever, and has been for quite some time. It’s also the seventh-largest active shareholder of the company, so it knows the business very well.
For this reason, Smith, and his head of research, Julian Robins, published this letter detailing their views on the potential acquisition. This is what they said about the purpose of their letter: “It is about a near death experience as it now appears that Unilever’s attempt to purchase the GSK Consumer business is now thankfully dead rather than the value of our investment in Unilever.”
Ouch. This is about as scathing as it can get. Fundsmith thought that the valuation of £50bn was too high, and that the deal didn’t offer satisfactory returns for Unilever’s shareholders.
I agree with Fundsmith’s assessment of the deal. The £50bn valuation does look rich. It also came across as a bit desperate on Unilever’s part, suggesting it was looking for a huge acquisition to boost growth. The company is valued at just over £94bn today, so the potential £50bn acquisition was very significant.
Is Unilever stock a buy?
But now that the share price is almost 16% lower over one year, is there value here for me if I buy the shares?
Let’s start with Unilever’s growth expectations. Earnings are expected to stay approximately flat in 2021, and rise by almost 5% in 2022. This isn’t too exciting for me as an investor, so I wouldn’t expect much growth in the share price based on these forecasts.
However, Unilever is a large-cap stock and a member of the prestigious FTSE 100 index. It may have attractive income characteristics for my portfolio as a potential shareholder. In fact, the dividend yield for 2022 is expected to be 4%. This is a respectable yield, so I can see why I’d be interested in buying Unilever stock for its income potential. But again, the growth expectations aren’t great for the dividend either. It’s forecast to rise by 3% in 2022, and under 5% in 2023, so about in line with the company’s tepid earnings growth.
The valuation still seems a bit rich to me as well. Based on a forward price-to-earnings ratio, the shares are valued on a multiple of 17. I consider this high for the potential for growth ahead.
So, taking everything into account, I won’t be buying Unilever stock. I can see the attraction in the dividend yield. But the potentially aggressive acquisition strategy and valuation is enough to put me off buying the shares today.
