I’ve been looking for an opportunity to add Unilever (LSE: ULVR) shares to my portfolio for ages, so could this finally be my moment?
The consumer goods giant has been one of the best performing stocks on the FTSE 100 for years, delivering steady dividend income and share price growth.
The only thing that stopped me buying was the fear I was coming to the party too late. Also, it was too expensive, typically trading at around 24 times earnings, while yielding a relatively-low 3%.
Top stocks aren’t always cheap
So instead I went bargain hunting for stocks with low single-digit valuations and much bigger yields of 6% or 7%. That’s still my preferred target market.
I repeatedly told myself I would buy Unilever shares on a dip, which duly arrived in March last year, as inflation rocketed and consumers suddenly became a lot poorer. Also, Unilever management made mistakes of its own, blundering into fruitless ‘woke wars’, and incurring the contempt of star fund manager Terry Smith, a major investor.
Smith accused Unilever of “virtue signalling” rather than focusing on financial performance. He also described Unilever’s failed £50bn bid for GSK’s consumer division as a “near-death experience”. I should have bought Unilever shares at the height of the controversy one year ago, because they are up 20.03% since then.
Yet measured over five years, they haven’t been such a great investment, rising just 10.57%. If I’d invested £10,000, I’d have just £11,057 today. That’s not the end of the world, but it’s not that exciting either.
However, I would also have got dividends on top. My £10k would have bought 247 shares, at the April 2018 price of 4,051p per share. My crude calculation suggests this would have given me £1,650 worth of dividends, lifting my stake to £12,707. That’s a bit better.
It’s finally time to act
So should I buy Unilever shares today? This morning, it reported a “strong start to the year” with underlying Q1 sales growth of 10.5% across all business groups and geographies. Sales of billion-euro-plus brands Omo, Hellmann’s, Rexona and Lux led the charge. Turnover increased 7% to €14.8bn.
Unilever held the quarterly interim dividend at €0.4268, while its third €750m share buyback tranche, announced in March, will be completed in July.
Today’s dividend yield is 3.4%, covered 1.7 times by earnings. The forecast yield is a juicy 4.6%, with cover still fairly solid at 1.5. While these are roughly in line with the FTSE 100 average, history suggests Unilever offers above average share price growth prospects.
Its shares are still expensive at 19.92 times earnings, but that’s cheaper than usual. This is a premium stock, and I expect to pay a premium price for it.
As with any share, there are risks. A global recession could hit sales. Dividends are never guaranteed and as we have seen, even Unilever’s shares can suffer periods of underperformance.
I’d love to buy Unilever on a dip, but that isn’t as easy as it sounds. First, the stock will have to actually dip. Second, I’ll need to make sure I don’t lose my nerve and waste the opportunity again. Instead of trying to time my purchase, I will simply buy it when I have the cash. Probably in May.
