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3 reasons to buy Unilever plc in 2017

After reaching all-time highs in early October, shares of consumer goods juggernaut Unilever (LSE: ULVR) are down more than 10%. Why? Well, it’s not down to any poor trading news from the firm. Instead it follows a global pullback in consumer staples. Rising US interest rates are allowing institutional money that’s seeking yield to return to the bond world rather than chancing it with high yielding, relatively low risk, equities such as Unilever. But for retail investors, I think now is the perfect time to take a closer look at what’s still a stellar company trading at a more reasonable valuation than it was just three months ago.

The primary reason I find Unilever attractive is the company’s well-known defensive characteristics. It hardly matters if unemployment is 4% or 12% when it comes to selling tea, laundry detergent and soap. This is in evidence in the table below, showing resilient revenue and profits even during the depths of the Financial Crisis.

 

Revenue (€m)

Operating profit (€m)

2007

40,187

5,245

2008

40,523

5,898

2009

39,823

5,888

2010

44,262

6,339

This proven ability to keep sales and profits relatively stable, if not growing, during a recession is a great sign of a long-term winner.

The second reason I’ve got my eye on Unilever going into 2017 is the company’s relatively good growth potential. Now, we generally think of a £100bn market cap company such as Unilever as a rather staid option. But, Unilever puts this idea to rest due to its high exposure to emerging markets. These markets such as Indonesia and China now account for over 50% of Unilever’s overall sales and are growing at a rapid clip.

Growth, growth, growth

In the first nine months of 2016, underlying sales from developing markets grew an impressive 7.2%. While this figure is less astounding once we’ve accounted for currency fluctuations, it still shows that Unilever has found emerging markets a stellar source of growth. And the fact consumers in these markets are buying higher volumes of its products even as major economies such as Brazil and South Africa suffer, bodes well for its long-term potential.

The third major attraction of Unilever in my eyes is the company’s wide moat to entry. Competitors are mainly other giant multinationals. Why? Because selling consumer staples isn’t an incredibly profitable business unless you have the ability to buy in bulk, combine back office functions and roll out winning brands in multiple markets. It has all these characteristics, which a major reason why core operating margins hit a very healthy 15% in the first six months of 2016.

High margins and relatively low potential for market disruptors also allow Unilever to return substantial cash to shareholders. Dividends payouts have risen over 18% since 2011 and shares now yield a very healthy 3.25%. With solid dividends, high growth potential and reliable sales, this is one share I reckon could be a long-time winner. The only downside is that many others feel this way and the shares now trade hands at a pricey 20 times forward earnings. I still like Unilever’s long-term potential, but I’ll definitely be looking for a cheaper valuation before I begin any stake.

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Ian Pierce 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.