Should I Buy Unilever?
Oct 12th 2012 4:49PM
Updated Oct 12th 2012 5:06PM
LONDON -- It's time to go shopping for shares again, but where to start? Energetic high-yielder SSE? Cut-price Tesco? Or bounce-back brand Burberry?
Over the last two years, consumer goods giant Unilever's share price has grown twice as fast as the FTSE 100. Who wouldn't want to take a bite of that?
Unilever has been a firm Fool favorite for years. It's a strong, solid company, with a smorgasbord of food brands, including Lipton, Knorr, and Ben & Jerry's, and a cupboard full of household goods, including Persil, Omo, Vaseline and Dove soap. There is absolutely no way you don't have several of its 400 products in your own home, so, in a way, we all own a piece of Unilever. The question is, should I buy its shares as well?
Unilever isn't just stocking kitchen cabinets in Europe and the U.S., it is spreading into emerging markets. A mighty 2 billion people use its products every day. It may be listed on the FTSE 100, but it is a truly global stock.
Unilever's global diversification gives it great resilience. While its European markets have caught a financial cold, China and Asia administered a healthy dose of investment vitamin C. In July, Unilever shrugged off the summer snuffles to post healthy second-quarter results. Turnover rose 11.5%, underlying sales grew 5.8%, and pre-tax profits rose 1%. Investors perked up. Unilever's share price hit an all-time high.
To Hellmann's and back
Growing market share, successful brand building and five years of rising profits, sales, and dividends. What's not to like? Unilever remains bullish, claiming it can double its sales by focusing on emerging markets, notably China and Eastern Europe.
The problem is that at its current share price, it needs to serve something special to investors. Unilever currently trades at a pricey forecast price-to-earnings ratio of 18 times earnings for December, which is why most analysts now label it a hold rather than a buy.
If Unilever is already in your portfolio, you will be holding it close to your heart and cherishing that cheeky 3.3% yield. But should the rest of us make a play for it?
I'm impressed by its pricing power. Unilever increased both prices and sales in the first quarter of this year, no mean feat as consumers retrench. People still need Domestos, even in the recession.
I'm also impressed by the fact that it has kept growing, while rivals Danone and Procter & Gamble have struggled. And since emerging markets already make up more than half its business, doubling that figure should produce a powerful return.
Unilever is a great company, and it's on a roll. But as it's trading close to its 52-week high, my worry is that new investors won't clean up.
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The article Should I Buy Unilever? originally appeared on Fool.com.Harvey Jones doesn't own shares in any company mentioned in this article. The Motley Fool owns shares in Tesco, and has recommended shares in Burberry. Motley Fool newsletter services have recommended buying shares of Unilever.
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