Unilever (LSE: ULVR) is one of the most popular stocks in the FTSE 100. Investors are drawn to its dependable earnings stream and consistent dividend payouts. As a result, it rarely trades cheaply. The current forward-looking P/E ratio is a relatively high 20.9.
Normally, I’d be put off by such a high valuation. After all, Unilever is essentially a pretty boring consumer staples stock. However, in this case, I think that valuation could be justified. Here are three reasons why I’d consider buying Unilever shares today.
Compelling growth story
When investing for the long term, I look for big powerful trends that can drive growth going forward. One such trend I’m extremely bullish towards is the growth of the world’s emerging markets, and the rising wealth of consumers in these regions. This theme is one of the reasons I rate Unilever highly, because the company looks very well placed to capitalise on this.
Indeed, it now generates almost 60% of its sales from the emerging markets. The stock is essentially a play on the rising wealth of consumers in these regions. For the most recent financial year, emerging markets provided underlying sales growth of a solid 5.9%. With the spending power of consumers across countries such as India, China and Brazil likely to continue increasing in coming decades, I believe demand for Unilever’s brand name products such as Dove soap and Lipton tea should remain robust. As such, Unilever is a stock you can buy and forget about, to my mind.
Share price correction
It’s also worth noting that the stock has endured a correction over the last three-and-a-half months. Back in mid-October, the shares were up around the 4,550p mark. However, in 2018, the stock has been available to buy for as low as 3,940p. That’s actually a decent correction of over 13%. Will it fall lower? That’s impossible to say. However, it’s also worth remembering that Kraft-Heinz wanted to buy the company for $50 per share (around £40 at the time) in February last year. So the 4,000p region could hold up as support. That makes me think that at the current price, it could be a good time to buy.
Lastly, as a dividend investor, Unilever’s consistent payout appeals to me. The yield is not the highest in the FTSE 100, at 3.1% currently, but the distribution is growing at a healthy rate. For example, over the last five years, the payout has been increased from €0.97 to €1.43 per share. That’s a compound annual growth rate (CAGR) of an inflation-beating 8%. With relatively constant revenue and earnings no matter the economic conditions, the company should be able to continue rewarding shareholders.
Naturally, Unilever’s price will be too high for many ‘value’ investors. Neil Woodford was most likely referring to the stock when he recently said that the popularity of companies perceived to be capable of delivering dependable growth in a challenging global economic environment has “manifested itself in extreme and unsustainable valuations.”
Yet after a 13% share price correction, I believe now could be a good time to give the stock a closer look.
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Edward Sheldon owns shares in Unilever. The Motley Fool UK owns shares of and has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.