Should you buy Unilever plc and Associated British Foods plc on the dip?

Image: Unilever. Fair use.

With the stock market near its all-time high, it makes perfect sense to buy quality stocks at a discount on the expectation that their share prices will eventually bounce back. The idea behind this is that even high quality companies suffer from short-term setbacks, and periods of weakness offer investors an opportunity to pick up more shares at lower prices.

Here are two blue-chip growth stocks to consider following recent falls.

Margin headwinds

Unilever‘s (LON:ULVR) share price has come down by about 5.5% since its pricing stand-off with Tesco last week. Though the details of the resolution remain secret, Tesco appeared to have come out as the winner, and given the dip in Unilever’s shares, the market seems to agree.

Although many analysts have described the dispute as a PR stunt, it highlights the difficulties that Unilever is facing with growing its revenues and margins. While many of Unilever’s brands have impressive pricing power, competition among food brands is intensifying, and consumers are becoming ever more price conscious.

However, despite these concerns, Unilever continues to deliver steady growth. Just last week, the company reported underlying sales grew by 4.2% in the first nine months of 2016, with emerging markets performing particularly well. Higher margin non-food sales are also selling well, and analysts expect its core operating margin to rise to 15.2%, from 14.8% last year.

City analysts have consensus forecasts for Unilever’s earnings per share of 160.4p for this year and 175.3p for next year. These figures imply earnings growth of 3% and 9% for 2016 and 2017, respectively, and put the shares on a forward P/E of 22.2 times for this year and 19.9 times for 2017.

On an income perspective, the shares currently yield 3.1%, which is somewhat below the FTSE 100’s average dividend yield of 3.9%. But because of the recent fall in the value of the pound, UK investors can look forward to potential dividend growth of 8.6% for this year and 5.8% next year.

Bad weather

Another stock suffering from short-term setbacks is food and retail company Associated British Foods (LSE: ABF). Firstly, unseasonable weather has meant it taking a hit on sales at its fashion chain Primark, and secondly, falling bond yields following the Brexit vote in the 23 June referendum caused its pension scheme to swing from being in surplus last year to a deficit of £200m.

These headwinds will no doubt put pressure on short-term earnings and cash flow, but the company also benefits from a number of tailwinds. The outlook for sugar prices is finally improving after years of being under pressure, and thanks to the group’s currency hedges, the recent fall in sterling has little impact on costs in the short term.

Associated British Foods trades on a forward P/E of 23.6, based on this year’s forecast earnings per share of 104.2p, and 21.3 times next year’s estimated earnings per share of 116.5p. On a first glance, that’s still a pretty high rating, particularly given that earnings are only forecast to increase by just 2% this year and 12% next year.

That said, ABF’s valuation multiples are actually well below its five-year historical average forward P/E of 27. What’s more, with a current dividend yield of just 1.4% and a dividend cover of nearly three times, there’s huge scope for dividend growth.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.