If someone entrusted me with $2.5 million to set up a trust fund for a loved one, one of the first purchases would be 1,000 shares of Unilever (UL). I use this fiction as the frame for this Unilever article because it is the type of stock you consider when pursuing a strategy of “income and growth at a reasonable price” investing.
It plays into that sweet spot of offering moderate earnings growth, decent current income, and the minimal possibility of capital loss. At the current price of $40.85, my guess is that Unilever shareholders will earn long-term annual returns of 8-9%. I anticipate this will come from a combination of the 3.4% dividend yield and expected 5% earnings growth that will translate into 5% annual capital gains. It would be a great way to give a beneficiary meaningful income to meet current living expenses while also positioning the trust fund for future growth that will fund lifestyle upgrades for years to come.
Because it is a dual-listed stock that has primary listings in both Rotterdam and London, it doesn’t get much attention in the United States as its peer Procter & Gamble. This lack of geographic-centrism shouldn’t lead you to underestimate the quality of Unilever’s asset base.
The consumer business lines bring in the cash from a variety of sources. Unilever shareholders have a claim on Axe body spray and deodorant, Dove soap, Heartbrand ice cream, Hellmann’s mayonnaise, Lipton ice tea, Magnum chocolates (the condoms, on the other hand, are owned by Trojan which is a subsidiary of Church & Dwight), Lux soap, and Sun dish washing. It has dozens of niche subsidiaries, ranging from Ben & Jerry’s ice cream to Pot Noodles to its recent purchase of the Dollar Shave Club.
This is the kind of stable cornerstone stock you consider when you have an eye towards owning an asset that is recession resistant. Unilever was pumping out $1.74 per share before the recession in 2007, and was making $1.68 per share during the worst of it in 2009. The worst recession of my lifetime only took earnings down 3%.
The cash, meanwhile, kept coming in. Dividends of $0.99 in 2007 went up just a tad to $1.01 by 2009. If you needed investment income from your portfolio to help out with the bills, Unilever is one of those stocks that remains a cash-generator even when economic conditions deteriorate.
And as economic conditions improved, so did the cash payout to shareholders. Those $1.01 dividends in 2009 grew to $1.40 in 2016, for a seven-year annual dividend growth rate of 4.8%. It is a quintessential growth at a reasonable price type of investment. You won’t be able to point to a small pool of capital and say “Look! That Unilever stock turned me into a millionaire twenty years later!” but it does provide a steady doubling of your principal every eleven years and a steady doubling of your income every thirteen years. When you consider that this benefit is coupled with exemplary cash-generating stability during challenging economic conditions, you can see why it has a place.
On a constant-currency basis, Unilever is earning $2.15 per share (it is earning $2 per share on an as-stated basis). That is a valuation of 18.6-20x earnings depending on which figures you believe are the best representation of current earnings power. This is a stock that has traditionally traded in a range of 18-22x earnings. The current price of $40.85 gives new shareholders a fair, though not great, deal. Compared to a lot of other stocks, that is quite attractive on a relative basis right now.
If you are looking to make an investment that fills the stability with modest growth niche at a fair price, Unilever beckons.
Originally posted 2016-12-13 21:47:25.