Legendary US investor Warren Buffett mostly works on his home turf. But he does make the occasional foray onto this side of the Atlantic. Today, I want to highlight a FTSE 100 stock I know Buffett has admired and explain why I think he’d buy it today.
The company is consumer goods group Unilever (LSE: ULVR). This £100bn firm recently made headlines with a failed bid to buy GSK‘s Consumer Healthcare division. It was also the most-purchased share by clients at broker Hargreaves Lansdown last week. I’m normally cautious about popular stocks, but I’m interested in Unilever. Here’s why.
Why is Unilever making headlines?
Brands such as Hellmann’s, Domestos and Ben & Jerry’s don’t need much introduction. But it’s no secret that Unilever has been struggling to deliver much growth recently.
In fact, Unilever’s sales and profits in 2021 are expected to have been lower than they were in 2017, when Buffett formed part of a bid to buy the FTSE 100 group for $50 per share (around £37).
That bid was rejected, and the deal went no further. But the underperformance that led to Buffett’s approach still seems to be an issue today. With inflation rising in many markets around the world, Unilever is putting up prices to offset higher costs. Unfortunately, that’s hitting sales volumes as hard-pressed consumers buy less, or choose cheaper alternative brands.
I don’t see any serious risk to Unilever’s big brands, or its long-term survival. But I agree with outspoken fund manager Terry Smith that something needs to be done to return this business to growth.
What’s changing?
Chief executive Alan Jope hit the headlines again on Tuesday when he said that around 1,500 management jobs will be cut as part of a global reorganisation. Alongside this, its main business groups will be split into more self-contained units — ice cream will become a standalone division.
These changes seem fine to me as far as they go, but they’re not exactly earth-shattering. Job cuts and reorganisations are a standard response from big companies under pressure to perform.
My fear is that you can’t always do more with less. I think Unilever may need to invest more in new product development and brands, rather than relying too heavily on pricey acquisitions for new ideas.
Why I think Buffett would buy this FTSE 100 stock
Buffett once said: “I like buying quality merchandise when it is marked down.” That’s where I think Unilever is today. The company is going through a difficult patch, but it’s been in business for more than 100 years and hasn’t cut its dividend for over 50 years.
Smith says that despite his criticisms, he’s still holding Unilever in his funds “because we think that its strong brands and distribution will triumph in the end.” That’s my view too.
Unilever is currently trading on 18 times forecast earnings and offering a 3.6% dividend yield. I think that’s good value for this FTSE 100 stock, given its quality credentials.
I’ve added to my Unilever holdings recently, so I’m not buying more at the moment. But if I hadn’t already bought, this FTSE 100 stock would be top of my shopping list right now.
