Unilever (LSE: ULVR) (NYSE: UL.US) has had an interesting year, with shares climbing to reach a peak of just under £29 in May.
Back then it seemed as though the company could do little wrong, with it being one of the most exciting emerging market plays.
However, a recent warning that conditions in the developing world may not be as rosy as expected sent shares tumbling to a low of just over £23, before recovering slightly to reach their current level of £24.
Indeed, this fall of 20% and the subsequent uptick has made me believe that shares are due a recovery. In my view, it seems as though the market has now priced in some slight disappointment at the next reporting date and sentiment has picked up since that correction, reflecting the fact that Unilever remains extremely well positioned to benefit from continued growth in the developing world.
So, with sentiment being reasonably positive since the initial share price fall, I’m thinking of buying shares in Unilever.
Of course, what I feel is an attractive share price chart is not the only reason. I’m also impressed with the sustainability of Unilever as a business, with a significant amount of interest cover highlighting the fundamental strength of the company.
Indeed, headroom when servicing its debt is generous, with Unilever having an interest coverage ratio of 13.6. This means that the company could have paid the interest on its debt over 13 times using its operating profit and provides evidence of both the profitability and moderate leverage the company is currently utilising. As a potential investor, this is just the kind of thing I want to see.
In addition, I feel that there is scope for Unilever to pay out a considerably higher proportion of earnings out as a dividend. It currently pays out two-thirds of profit as a dividend and, although reinvesting in the company’s portfolio of brands and making the business more efficient are important, I think that the payout ratio could be nearer to three-quarters of earnings.
This would be a positive step for income-seeking investors like me and, I believe, would not lead to underinvestment in the business and its future.
So, I’m thinking of buying Unilever as a result of its encouraging share price chart, its impressive interest coverage as well as the potential to pay out a greater share of earnings as dividends.
