Like drinking water, writing a to-do list, and staying off social media, some of the best ideas are pretty straightforward. And that might also be the case when it comes to earning passive income.
Despite the FTSE 100 hitting record levels, shares in Unilever (LSE:ULVR) are almost 10% off their 52-week high. So should investors stop overthinking things and start buying the stock?
Unilever’s business
Investors who don’t read the label on everything they buy are probably familiar with more Unilever products than they can name. But the business is actually in the process of shifting its strategy. It’s moving from trying to infiltrate people’s cupboards by owning every branded product under the sun to focusing on its strongest names. These include the likes of Domestos, Dove, and Persil.
Divested lines include Alberto Balsam (which I like), Brylcreem (which I don’t), and Lever 2000 (which I’ve never heard of). And it’s also selling its ice cream unit, which includes Ben & Jerry’s and Magnum.
Despite the shift, the underlying business model’s still familiar. The firm’s brands give it negotiating power with retailers and its distribution network helps it position its products all across the globe.
Dividends
Unless something truly desperate happens, I don’t think demand for the kind of products Unilever sells is going to drop dramatically. And the company’s in a strong competitive position.
Investors might therefore see the recent drop in the share price as a potential buying opportunity. The dividend yield‘s around 3.2%, which doesn’t look like much but that could change if interest rates fall. This is roughly in line with the stock’s 10-year average. But Unilever’s portfolio adjustments have resulted in good sales growth, so I think there’s a decent chance of the dividend increasing from here.
I think investors looking for passive income might do well to consider shares in a company that has recognisable strengths. Especially when it might have a bright future.
Risks
Unilever’s a long way from the cutting edge of technological innovation. But there are still some key risks that investors considering the stock should be aware of. One of the firm’s biggest challenges is its products typically have zero switching costs. People don’t have to buy Dove soap because it’s the only one that’s compatible with their bathroom sink.
As a result, there’s always a risk of customers trading down to cheaper store brands – or across to Procter & Gamble products. That means an ongoing battle for market share, where nothing’s certain.
Investors should be aware of this when considering the stock. But it’s also worth noting that a huge marketing budget gives Unilever an advantage in keeping its products at the front of consumer minds.
A stock to consider
At first sight, Unilever’s business is pretty uncomplicated. But there’s a lot that goes on behind the scenes to help the FTSE 100 company hold on to its dominant market position.
That might be a good combination for investors. And with the stock down almost 10% from its 52-week highs, I think it’s well worth considering at today’s prices.
This post was originally published on Motley Fool
