The first stock purchase of the month. Always an exciting time, right?
I’ve recently read some commentary that attractively valued, high-quality stocks are becoming somewhat of an extinct species these days. I don’t know if I totally agree, but I certainly see a lot less value across the entire market today than even just one year ago. However, that’s not to say opportunities aren’t still out there, and those remaining opportunities are exactly where I focus my attention. After all, I’m typically investing $2,000 to $3,000 across 1-3 stocks per month, so I can be selective and successful simultaneously.
This recent buy should come as no surprise, as it was the top stock on my watch list for this month. As always, I put my money where my mouth is. I generally try to follow through on my watch list with subsequent purchases, but stock prices don’t always cooperate. This time, however, there was full cooperation in effect and I took advantage of that.
I purchased 30 shares of Unilever PLC (UL, Financial) on 11/10/14 for $40.37 per share.
Overview
Founded in 1930, Unilever Plc is a global manufacturer and supplier of consumer products. They sell their products in over 190 countries.
The company operates in four segments: Personal Care (36% of fiscal year 2013 sales); Foods (27%); Refreshment (19%); and Home Care (18%).
They further operate in three geographical product areas: Asia, AMET (Africa, Middle East, Turkey), RUB (Russia, Ukraine, Belarus) (40% of FY 2013 sales); The Americas (33%); and Europe (27%). Emerging markets comprise 57% of UL’s business.
Unilever sports 14 €1 billion brands, among a portfolio of more than 400 brands. Some of their most popular brands include: Axe, Ben & Jerry’s, Breyers, Country Crock, Dove, Hellman’s, Klondike, Knorr, Lipton, Magnum, St. Ives, Surf, and Vaseline.
It’s important to note that Unilever was founded in 1930 following a business merger between Naamlooze Vennootschap Margarine Unie of the Netherlands and Lever Brothers Limited of the UK. As a result, two controlling companies were set up – Unilever N.V. and Unilever PLC. They operate effectively as a single economic entity. Both the Dutch and UK companies offer ADR shares that trade on the New York Stock Exchange, and both stocks represent equal ownership in Unilever. This article will be referencing the (UL, Financial) shares, which are the ADR shares of London-listed Unilever Plc. These shares do not have any foreign dividend tax withholding due to a tax treaty between the US and the UK. Unilever N.V. is listed in Amsterdam, and its ADR shares trade on the NYSE under (UN).
Conviction
I just initiated a position in this company last month, and performed a relatively in-depth analysis of it at that time. So I’ll spare you from repetitive content. But if yo’u’re looking for fundamental data and a qualitative analysis, you’ll find it there.
The only thing that has really changed between then and now is that the company announced Q3 results. Much of what I would expect came to pass. Volume and sales growth are both up, especially so in emerging markets. However, overall revenue is down due to currency effects and disposals. Revenue was down 2% YOY for the third quarter after factoring in a (2.6%) currency effect, but a full (1.5%) was related to disposals.
I do want to mention that I have a lot of conviction in this investment. I find that as I grow and learn as an investor, I naturally find myself with varying amounts of conviction in companies. Sometimes that’s due to the cyclical nature of certain industries, or sometimes I just feel like I understand certain products and/or companies more than others. And I find myself drawn to a company like Unilever because it’s easy to understand ice cream, shampoo, soap, butter, and tea, among other products.
And I can clearly and easily envision a future where they sell more of these products to more people, ensuring more profitability and thus more dividend income my way.
So this purchase comes at essentially the same price as last month. I didn’t feel a need to average down, and I continue to believe this is a high-quality company already trading for an attractive price. I would be sooner surprised to see the stock dramatically drop from here rather than trade 10% higher over the course of the coming months. As such, I’m eager to buy in now.
The stock yields 3.6% here, based on extrapolating out the $0.3637 quarterly dividend. It’s important to note, however, that UL’s dividend oscillates a bit in dollar terms due to the fact that the company declares its dividend in euros, which gets converted to dollars for US investors. I find that to be a pretty solid yield considering the defensive and stable nature of the business, as well as the fact that the company has grown its dividend by a compound annual rate of 7.5% over the last decade in dollar terms.
For those interested, UL has this great introduction to the company on their investor relations site. You’ll note that they have the #1 or #2 market share for products in fabric cleaning, hair care, skin cleansing, face care, tea, and ice cream across a multitude of countries in emerging markets.
I have a lot of conviction in this investment, and if it continues to hover around $40 I’ll likely add to it over the coming months. I’d like to get this position up to 100 shares over the course of the next few months, if my cash flow, competing opportunities, and UL’s stock price allows.
Risks
As I recently pointed out, I believe that UL is a low-risk investment, all things considered. The demand for their products should stay relatively unchanged through most economic cycles, as people still have to eat, clean, and groom themselves even in a recession. However, the consumer products space is highly competitive. So there is always pressure on pricing and competition for shelf space.
Valuation
Obviously, my opinion on the valuation hasn’t changed over the course of a few weeks. The Q3 report didn’t change the long-term investment thesis or quality of the company, as they are well-positioned to take advantage of better economic conditions in the future. The stock trades hands for a P/E ratio of 18.04, which is in line with its five-year average. It’s also on par with the broader market.
I valued shares using a dividend discount model analysis with a 10% discount rate and a 6.5% long-term growth rate. 6.5% is below UL’s long-term growth rate for both earnings and its dividend, so it would appear that’s conservative. The DDM analysis gives me a fair value of $44.27, which implies a ~10% margin of safety here.
Conclusion
Unilever sells high-quality, in-demand branded products to billions of customers all over the world. 400 brands, of which 14 generate more than 1 billion euros in annual sales, is phenomenal, and is certainly a story I want to be a part of. I personally use some of Unilever’s products myself, and I know I’m not alone – the company cites that more than 2 billion consumers worldwide use a Unilever product every day.
I think the odds are very good that UL will be more profitable 10, 20, and 30 years from now and sending shareholders like me even more dividend income.
This purchase adds $43.64 to my annual dividend income, based on the current $0.3637 quarterly payout.
I’m going to include current analyst valuation opinions below, as I use these to concentrate my reasonable valuation estimate:
Morningstar rates UL as a 3/5 star value, with a fair value estimate of $44.00.
S&P Capital IQ rates UL as a 2/5 star sell, with a 12-month target price of $35.00.
I’ll update my Freedom Fund in early December to reflect this recent purchase.
Full Disclosure: Long UL.
What do you think? Does today’s price represent a good value for shares in Unilever?
Thanks for reading.
