Any investor who has backed the Unilever (LSE: ULVR) share price to recover from its recent troubles is having to be patient. It’s done poorly for ages.
Shares in the FTSE 100 consumer goods giant are down 5.44% over one year and 3.82% over five, spreading misery wherever they’re held. As a self-proclaimed contrarian, I saw this as a buying opportunity but it hasn’t come good yet.
I’d wanted to buy Unilever shares for years as they regularly outpaced the FTSE 100, but decided they were too expensive trading at a price-to-earnings ratio of around 24 or 25 times, while yielding a lowly 2.5% or so.
Finally, it looks cheap
I finally bought it on 7 June last year, at a P/E of around 17 or 18 times earnings. The share price almost immediately dropped another 10%, and hasn’t picked up since. Friday was a rare exception, with the stock jumping 2.69% as investors celebrated Chinese plans to revive its leaden stock market with a $278bn stimulus package.
I’m not the only one suffering. Renowned buy-and-hold fund manager Nick Train holds Unilever in his Finsbury Growth & Income trust’s concentrated portfolio of UK stocks. It’s one of the reasons he’s been underperforming.
Train owns the stock “because of the participation it offers to growing disposable income of
the middle classes in emerging markets, notably India,” and for its “many brands beloved by consumers in the developed world, from Magnum to Marmite”. Guess what, Nick, that’s why I bought it too! Great minds, eh?
Or maybe not so great as the board has made a string of unforced errors. These include an ill-starred pursuit of FTSE 100 pharmaceutical firm GSK; a controversial foray into “purpose-driven brands”, which Fundsmith Equity manager Terry Smith publicly derided as “ludicrous” (although others applauded it for this in an age when more consumers are conscious of ‘ethical’ brands); legal wrangles over Israel with Ben & Jerry’s; and a regulatory probe into the company’s green claims.
I’m taking the long view
I bought Unilever in the hope it would get its act together, but these things don’t happen overnight, as Marks and Spencer‘s long turnaround shows. It now has a new chair, chief executive and chief financial officer, and Train hopes “the focus on growth and profitability they have promised will spark Unilever’s business and share price performance”. Train believes things should get better once input cost pressures slow and interest rates fall, and that’s what I believe too.
There are some positive signs, with underlying sales growth up 5.2% year on year in Q3, roughly in line with the board’s full-year target. Unilever remains cheap by its own standards, trading at 16.98 times earnings. The yield has crept up to 3.86%.
I’ve said for years that my strategy is to buy good companies at discounted prices when they’ve fallen out of favour, and sit patiently for the recovery. To sell Unilever would abandon that fundamental investment principle, so I’m not going to do it. I’ll stand by my stock pick, just like Nick Train is doing. Now let’s see some of that growth and profitability, please.
