Consumer goods group Unilever (LSE: ULVR) is near the top of broker Hargreaves Lansdown‘s ‘Top of the Stocks’ chart this week. It seems investors have been buying into the share price dip which followed last week’s annual results.
I’ve just added Unilever back onto my buy list too. I reckon that owning shares in the producer of brands including Hellmann’s, Lipton, Domestos and Persil could boost my investment returns over the coming years.
Why are Unilever shares falling?
Unilever released its 2020 annual results last week. These figures showed sales fell by 2.4% to €50.7bn, with operating profit down 4.6% to €8.3bn. When profits fall faster than sales, it means profit margins have also fallen. That’s true here. Unilever’s operating margin fell from 16.8% to 16.4% last year.
Unilever’s share price also fell after these results were announced. The stock is now down 15% over the last year. This slide may partly be because the market is used to reliable growth from Unilever.
The pandemic also hit sales of more profitable products such as ice cream. Covid-19 also added costs to Unilever’s operations and supply chain.
On balance, I think the firm’s 2020 results were fairly respectable. However, I think the detailed sales breakdown provided by Unilever does flag up a couple of potential concerns.
What could go wrong?
One worry for me is that the company was only able to increase average selling prices by 0.3% last year. That’s below inflation in most markets.
This suggests to me Unilever’s brands may be having a tough time competing with cheaper own-brand products sold by supermarkets. This is probably the biggest risk I can see for the business. In my household we buy a mix of own-brand and branded products, but price is always a factor.
A second more general concern for me is that brands and products can become dated. Unilever spent €6bn on acquisitions last year, up from €1bn in 2019. To some extent, I think that future success will rely on these deals providing attractive returns. That’s not guaranteed.
Unilever shares: right price, right time?
I can’t predict the future. But I think it’s a fairly safe bet that in 10-20 years’ time, millions of people will still be adding Unilever’s brands to their shopping baskets every week. I expect the group’s broad product portfolio and strong presence in growing markets such as China and India to support many more years of growth.
It’s this kind of reliable long-term growth that’s helped Unilever to become the largest business in the FTSE 100, despite its reduced share price.
Although 2020 was a difficult year, I still feel confident about the long-term outlook for this business. CEO Alan Jope is staying focused on his strategy of building brands that can deliver growth while staying true to the company’s philosophy of doing good.
Unilever’s business is highly profitable and generates reliable cash flows. The shareholder dividend hasn’t been cut for more than 50 years. With Unilever’s share price now down to around 4,000p, the stock has a forecast yield of 3.7%. I’m considering buying the shares for my long-term portfolio.
