I think Unilever (LSE:ULVR) is a stock that could be a great source of passive income for investors. And right now looks like a good time to be buying the shares, in my view.
The share price has actually held up reasonably well since the start of the year – down 2.7% compared to a 3% fall in the FTSE 100. But I’m still seeing an opportunity here.
Stagnation
Unilever’s business has been stagnant at best over the last decade. Revenues have increased at an average of 2.3% per year, which is below the rate of inflation.
That’s not a terrific sign and it’s no wonder that the company has some long-term shareholders voicing their discontent recently. But there’s a bit more going on below the surface.
Higher revenues aren’t the only source of growth. Through a series of share buybacks, Unilever has managed to increase earnings per share by an average of 5.5% over the last 10 years.
I think this looks like something that can continue. And fewer shares outstanding makes it easier for the company to keep growing its dividend per share.
Right now, the dividend yield is 4%. Whether or not that’s an attractive return – even with an added buyback – depends on where interest rates go during the next few years, which is hard to predict.
Nonetheless, if I thought the future for the business was going to resemble the past, I wouldn’t buy the stock right now. But I think Unilever could well be at something of a turning point.
Restructuring
Under Hein Schumacher, Unilever is changing direction. Most obviously, the company is getting rid of its less valuable brands and focusing on its strongest performers.
This is a big change, but I think it’s a good idea. After years of acquisition activity, the business is in a position where it has a number of underperforming brands mixed in with its best assets.
That’s why the financial results over the last 10 years have been mediocre. Growth from the firm’s top performers has been offset by mediocre results elsewhere.
Disposing of these should helps the firm move forward without that dead weight. But the strategy isn’t risk-free – discarded brands might become rivals for Unilever to compete with.
Despite the risk, I think there are reasons to be optimistic about the new strategy. One is Unilever has a bigger marketing budget than its rivals, which should be a significant competitive advantage.
Another is the fact that the company can be reasonably confident that the brands it is divesting are the weaker parts of its portfolio. And if Unilever can’t make them grow, it’s hard to see who can.
Why I’d buy the stock
At £37, Unilever shares are slightly cheaper than they were five years ago. But I’d argue that the business is in a much better position, so investing £1,000 to buy 27 shares looks good to me.
The company has a lower share count and is about to embark on what I think looks like a promising new approach. If the stock stays where it is, I’ll be buying it later this month.
