Is Unilever plc A Promising Capital-Growth Investment?

If we look at Unilever’s(LSE: ULVR) (NYSE: UL.US) longer-term share price chart, we can see that the consumer products firm has been a great capital-growth investment for those holding through the ups, downs and years-long periods of flat lining.

In early 2000 the shares traded at about 800p, which means today’s 2707p indicates a 238% increase in capital for fortunate holders, who will also have enjoyed a regular income stream from dividends. Long-term performance like that is often as good as it gets for any kind of buy-and-forget investment proposition.

Patience and faith

I think the underlying story told by that long-term share price chart has plenty of twists, turns and sub-plots though. Investors holding for the last fourteen years have done well simply to hang on. The very act of not selling seems to require patience and faith – perhaps two of the hardest qualities to apply for any investor looking after their own funds.

For example, buying first off, in 2000’s bear market, required faith that Unilever’s cash-generating consumer brands would not falter in recessionary times. Investors needed to project that names such as today’s stalwarts Lipton, Wall’s, Knorr, Hellman’s, Omo, Ben & Jerry’s, Pond’s, Lux, Cif, Sunsilk, Sunlight, Flora, Bertolli, Domestos, Comfort, Radox and Surf would keep the cash pumping. It was a good call – the shares rose to around 1300p before the year was out, delivering a 63% increase for astute shareholders.

How tempting it must have been to take profits then – with the shares back down to 1000p four years later, many persistent investors might have wished they had. How many would have lost patience as the shares stagnated? Yet, three years after that the shares were up at 1900p, vindicating the decision to hold on. Then the credit-crunch came, with Unilever shares flirting with 1200p in early 2009, perhaps that was enough to shakeout some investors. I hope not, because four years later in 2013 the shares had delivered a 130% gain and stood at over 2800p.

Short-term news is irrelevant

We find the strength of Unilever as a long-term investment in the basic business model underpinning the company. Unilever produces and markets stuff that people want, which has rock-solid repeat-purchase credentials, and therefore keeps the cash taps flowing.

Recent news that Unilever lost its head of Personal Care, to Tesco doesn’t matter a jot to the firm’s longer-term outlook. The director’s latest assertions that emerging markets continue to slow and that mature markets have yet to pick up is mere short-term noise. The fluctuating valuation placed on the firm and expressed in the P/E rating hardly matters at all.

Hard to break

A bet on share-price weakness has always proved to be an astute move in the past. Sales or profits might be down a bit, war and pestilence might have broken out around the world, the valuation might be signalling tough times ahead, and a key member of Unilever’s management team might have defected to another company, but none of that matters. The underlying fundamentals of the business model have always shone through. People keep buying soap, deodorant, soup, ice cream and washing powder, no matter what.  

With such a basic trading advantage, management within the firm will need to try really, really hard before they can destroy Unilever’s cash flow or shrink the company to destroy any investment in it. If things do start slipping, it’s very likely that the directors will respond to feedback and take corrective action, even if new directors need to be dropped in to do it.

What now?

Unilever strikes me as a promising capital-growth investment from here, as long as I use the strategy of taking a long-term view, say fifteen years at least. Tactically, I’d use share-price action to time purchases – buying on the bigger dips.