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Why Is Unilever plc So Expensive?

UnileverUnilever (LSE: ULVR) (NYSE:UL.US) is often considered one of those solid defensive stocks that should serve you well through good times and through bad.

The company produces all manner of consumer goods and sells them in all corners of the globe. Brands that bring in annual sales of £1bn or more include Lynx, Dove, Knorr, Surf, and Sunsilk — and Unilever owns something like a couple of hundred other brands worldwide.

Global scope

In 2013, a little over a quarter of Unilever’s revenues came from Europe, with a third from the Americas, and the remaining 40% from Asia, Africa, the Middle East and the rest of the world. That’s a pretty even geographic distribution, and it’s easy to see the defensive protection against any regional downturn.

With all that safety in mind, it’s little surprise that the recession didn’t trouble the Unilever share price too much — over the past 10 years, the crunch looks like a mere wobble, and Unilever’s price is actually up 125% against a modest 50% for the FTSE.

Also unsurprising is that Unilever’s shares command higher-than-average price to earnings (P/E) valuations. With a share price of 2,642p, its forward P/E based on forecasts for the year to December 2014 stands at a lofty 20 — way ahead of the FTSE’s long-term average of 14. And Unilever only offers fairly unexciting dividend yields of around 3.5% — just a bit ahead of the FTSE’s average of 3%.

Wobble

In the past 12 months, though, the share price has wobbled a bit — it peaked at over £28 last summer before dropping back almost to £23 by February this year, before recovering to today’s levels.

Has that slow year helped cool an overheating share price? I think it has, and I think Unilever is now receding from price levels that were just too high a year ago.

But are Unilever shares worth the money now?

Steady

I don’t think we’ll see the same stellar growth over the next decade as over the last, but I can see the Unilever price keeping pace with the FTSE over the next few years, and that dividend yield that’s a little ahead of average has to be attractive from such a solidly-defensive company.

So while I don’t think Unilever is a screaming bargain, I still reckon the next 10 years should see a decent performance.

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Alan does not own any shares in Unilever. The Motley Fool owns shares in Unilever.