The Unilever (LSE: ULVR) share price has had a torrid time in recent years but the worst seems to be over and I’m expecting great things to come. This would suit nicely since I bought the FTSE 100 stock when it was still down in the dumps.
I’d wanted to buy the consumer goods giant for years. The only thing stopping me was that Unilever shares were expensive trading at around 25 times earnings and yielding just 2% or so. I swore I’d buy on a dip, but didn’t really expect to see one. And then it happened.
What had always looked like a rock solid defensive business was suddenly under fire on almost every front.
FTSE 100 recovery play
Unilever’s big selling point – its exposure to billions of newly wealthy emerging market consumers – looked overdone as Latin American and Asian markets slowed. Falling local currency values didn’t help.
The rising cost of raw materials and packaging squeezed margins, while Unilever faced tough competition from rival behemoths Procter & Gamble and Nestlé. Unilever’s unsolicited £115bn takeover bid of Kraft Heinz in 2017 flopped. Activist investors circled, demanding the board got its act together.
Even Unilever’s dual listing in the UK and Netherlands came back to haunt it, as Brexit threatened regulatory confusion. Suddenly, one of Britain’s biggest companies was in a mess, and I saw my chance.
Catching a falling knife is never easy and I suffered an instant 10% loss after buying Unilever shares in June last year. As they started to stabilise, I bought more in May and June this year, and so far I’m up around 16%, including dividends. Over 12 months, the stock is up 21.15%.
Full-year 2023 was pretty solid and that’s continued in 2024. Underlying first-half sales climbed 4.1%, led by its 30 ‘power brands’, which grew 5.7%. Underlying operating margins rose 250 basis points to 19.6%. It’s not exactly going gangbusters, but it’s pointing the right way.
Dividend income and growth
CEO Hein Schumacher seems keen to reward shareholders, hiking the quarterly dividend by 3% and launching a €1.5bn share buyback. He’s acknowledged that Unilever still has a long way to go though, and he’s right.
Inevitably, the shares aren’t as cheap as they were. I bought at around 17/18 times earnings, today they trades at 21.71 times. The yield has slipped to 3.09%, but I expect recent shareholder largesse should continue. Unilever can afford it with free cash flow jumping 36% to €7.1bn in 2023.
I’m now tempted to top up my stake before the next leg of the recovery. But there are risks. If the US tips into recession, it could drag the world down with it, hitting Unilever’s sales. Schumacher needs to shake things up more than he has. His plans to offload non-core brands depend on finding a buyer.
Also, Unilever could get hit by the backlash against ultra-processed foods, especially if the Ozempic craze continues.
Yet I feel that Unilever is on the up and there’s more to come. I plan to top up my stake, and with luck, aim to hold this great British company for life.
This post was originally published on Motley Fool
