Unilever (LSE: ULVR) is often seen as a safe long-term investment. But the Unilever share price has been dipping since July, and has now fallen 9% since the start of 2021. Unilever shares are down more than 20% over the past two years, covering the whole of the pandemic period. And that’s not supposed to happen to a traditional safety stock, is it? So, is this a buying opportunity?
Top stocks tend to command perpetually high valuations, so how is Unilever looking now with that in mind? Based on earnings per share reported in 2020, the current Unilever share price gives us a trailing P/E of 18.7.
That’s a bit above the long-term FTSE 100 average, which tends to hover around 14 to 15. But it’s really not that much higher, and it’s relatively low for Unilever. Over the past five years, Unilever has been on an average year-end P/E of 20. On that score, I’m happy so far.
Dividend yield
What about dividends? The dividend has been a bit flat in recent years, but it’s still been yielding around 3.5%, with a forecast of 3.4% this year. The FTSE 100 overall had been yielding higher than that. But after the events of 2020, we’re expecting around 3.7% for 2021. Unilever, then, should be delivering only slightly behind the average in 2021.
There are others offering much bigger yields right now. British American Tobacco, for example, is on a forecast 7.5%. But for its relative long-term stability, I do find Unilever’s dividend yield attractive.
So why has the Unilever share price fallen to what I see as an undervaluation? The recent price dip has pretty much coincided with noises from the City about rising inflation. That can put the squeeze on margins, as it can take time for inflationary rises to work their way through the price chain.
Medium-term risk
And that, I think, is the biggest risk facing Unilever shareholders in the year ahead and perhaps beyond. After all, margins on staple food and hygiene products are not the biggest to start with. And at interim time, the figures were starting to show the effect. The firm’s underlying operating margin came in at 18.8%, down a percentage point. The report put that partly down to “input cost inflation.”
Underlying EPS dipped 2%. And free cash flow declined a little, from €2.9bn in the first half of 2020 to €2.4bn. But on balance, in the 2021 economic climate, I think the results were fine. Were I a Unilever shareholder, they certainly wouldn’t come close to making me want to sell.
Unilever share price attractive?
But should I buy? I’m not the only one, it seems, who sees the Unilever share price as low now. No, the company itself is in the middle of a big share buyback programme. Having completed the first tranche in August, Unilever promptly revealed a second phase which will see it investing up to €3bn to buy back its own shares.
So, I think we could see a bit of stagnation over the coming year or so. But I do like the idea of buying Unilever shares when they’re in a dip. Unilever is definitely on my Stocks and Shares ISA shortlist.
