3 Ways Unilever plc Will Continue To Lag Its Sector

How does Unilever plc (LON: ULVR) compare to its sector peers?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Right now I’m comparing some of the most popular companies in the FTSE 100 with their sector peers in an attempt to establish which one is the more attractive investment.

Today I’m looking at Unilever (LSE: ULVR) (NYSE: UL.US).

Valuation

Let’s start with the basics: Unilever’s valuation in relation to that of its closest peers and the wider sector.

Currently, Unilever trades at a historic P/E ratio of 18.3. In comparison, Unilever’s closest peers, Tate & Lyle and Associated British Foods, trade at historic P/Es of 13.6 and 23 respectively. Of course, as a global food producer with many household names within its portfolio of brands, Unilever is a highly defensive company and deserves a premium over its peers.

However, the food producers’ sector currently trades at an average historic P/E of 10.9, which makes Unilever and both of its close peers look extremely expensive.

Company’s performance

What’s more, City analysts currently predict that Unilever’s earnings growth will be less than impressive during the next two years. Indeed, City analysts currently predict that Unilever’s earnings will fall 3% this year before growing 5% the year after. 

In addition, Unilever’s earnings growth has been equally unimpressive during the past five years. For example, since the end of 2008 the company’s earnings per share have only expanded 12.6%.

Nonetheless, it would appear that close peer Associated British Foods does deserve its high valuation. In particular, while Unilever’s growth has been slow during the past five years, Associated British Foods has chalked up impressive earnings per share growth of 71%.

Additionally, Tate & Lyle’s earnings per share have expanded 52% during the same five-year period.

Dividends

Having said all of that, Unilever holds its own on the dividend front. At present, the company offers investors a 3.5% dividend yield, which is slightly above the food producers’ sector average of 3.1%.

Furthermore, this dividend yield is stronger than the offerings from both Tate & Lyle and Associated British Foods, which both currently support yields under the sector average.

Still, this high yield comes at a price. In particular, Unilever’s dividend payout is only covered one-and-a-half times by earnings, the lowest cover in the group. In comparison, both Tate & Lyle and Associated British Foods can cover their payout at least twice by earnings. 

Foolish summary

All in all, as a global and well diversified food producer, Unilever deserves some premium over its peers due to its defensive nature. However, Unilever’s huge premium over the rest of the sector does not appear to be justified, based on the company’s glacial earnings growth.

So overall, I feel that Unilever is a much weaker share than its peers. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

> Rupert does not own any share mentioned in this article. The Motley Fool has recommended shares in Unilever.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »