When just beginning, the stock market can seem incredibly confusing. Most of the time, it’s difficult to know where to start.
When I first started investing, I didn’t have much of an idea about what I was doing. I invested in companies without doing the proper due diligence. Unfortunately, it has meant that some of my earlier investments lost me money.
However, over time, as I’ve learned more about the stock market, I’ve found a strategy that suits me best. Now, I focus on buying high-quality businesses, predominantly on the FTSE 100 and FTSE 250, that I think will be able to provide me with healthy profits over years and decades. I also target companies where I clearly understand the business model and how revenue is generated.
If I were starting out again, here’s one stock I’d consider buying if I had some cash to invest.
Unilever
The business in question is Unilever (LSE: ULVR). The stock has had a brilliant start to the year, rising 11.7%. That means it has outperformed the FTSE 100, which is up 6.7%.
When I look at investing in a company, there are a few things I make a beeline for. Firstly, how cheap are its shares? Unilever trades on 19.6 times earnings. Compared to the Footsie average of 11, that may look expensive.
However, that’s below Unilever’s historical average of 25. That means there could be value in its share price today.
Secondly, does it pay a dividend? Dividends are a form of profit sharing that companies use to reward shareholders. Unilever has a yield of 3.5%.
That’s nowhere near the highest available on the FTSE 100. Vodafone takes that crown with a 10.2% yield. However, there’s a reason I favour Unilever’s dividend over the likes of Vodafone’s.
It’s because the business hasn’t cut its payout for over 50 years. Dividends are never guaranteed. A business can reduce or cut its payout altogether without warning. We saw this during the pandemic.
Therefore, a track record like that gives me confidence that the business has put an emphasis on rewarding shareholders and will continue to do so moving forward.
The risks
Investing comes with risks and with Unilever, I see some challenges.
The largest is the fact that it faces stiff competition from budget retailers such as Aldi. Unilever sells premium products that often come at a premium cost.
As such, with many people struggling during the cost-of-living crisis, it may see them switch to more affordable alternatives. Aldi has been aggressively gaining a greater share of the market in recent years, which may be a testament to this.
Pricing power
That said, I still like the look of Unilever shares today. While it faces competition, it has proven recently that it has strong pricing power.
Last year, even though its prices jumped 6.8%, it still saw underlying sales grow 7%. That highlights that demand for its products is strong.
As such, Barclays recently raised its target price for the stock to 5,200p from 5,000p. That represents a 21.5% premium from its current price.
