The valuation of fast-moving consumer goods company Unilever (LSE: ULVR) looks keener than it’s been for years.
The FTSE 100 stalwart’s share price is around 3,884p, as I write. And we haven’t seen it as low as this for around three years. Of course, a lower share price doesn’t guarantee a smaller valuation. But over those three years, earnings, cash flow and shareholder dividends have been generally increasing.
Unilever has been grinding on
Despite a slight wobble because of the pandemic, Unilever has been grinding forward doing what most investors expect of it. That is, delivering steady, consistent and defensive gains in its business. But the stock has been slipping lower since last autumn.
One possible reason for the slide is that many investors might have recently rotated out of expensive defensives like Unilever. Instead, many have been buying into Covid recovery stocks such as Whitbread, Barclays, Easyjet and others.
And over many years prior to the coronavirus crisis, defensive shares were popular for their dividend yields. Interest rates were low from cash savings and bonds. And investors bought steady stocks like Unilever instead. But all that buying led to rising share prices and higher valuations.
But it’s common for defensive shares to fall in and out of favour at various times. We tend to prize such businesses for their resilience. And they tend to be less affected by the ups and downs of the economy than cyclical companies. But I think defensive stocks are prone to something of a valuation cycle as their popularity waxes and wanes with investors.
Maybe all we are seeing now is a cycling down of valuations among defensive businesses. If so, this could be a decent opportunity for me to buy a few Unilever shares for the long term. After all, City analysts have pencilled in steady, single-digit uplifts in the shareholder dividend for this year and in 2022. And I reckon the firm’s well-loved brands look set to keep on powering cash flow.
A quality business with slow growth
However, one risk with Unilever is that the pace of growth is slow. The business scores well against quality indicators but it will probably never shoot the lights out with its annual figures for growth in earnings. So, if earnings slip in the years ahead, we could see even more contraction of the valuation. Indeed, the share price could continue to drift lower and I could lose money with Unilever’s shares.
But the forward-looking earnings multiple for 2022 is running near 17. And the anticipated dividend yield is just below 4%. I’m tempted by that valuation because it seems fair for the quality of the enterprise. My plan would be to tuck a few of the shares away to hold for the long term.
But Unilever isn’t the only big-cap defensive stock that’s caught my eye. I’d also run the calculator over AstraZeneca, British American Tobacco, GlaxoSmithKline, National Grid, Reckitt Benckiser and SSE. There are no guarantees that these stocks will perform well as investments though.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Barclays, GlaxoSmithKline, and 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.