Is Now The Right Time To Buy Unilever plc?

Unilever plc (LON:ULVR) is a great long-term stock, but buyers could profit from being patient.

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unilever2Unilever (LSE: ULVR) (NYSE: UL.US) shares have risen by 142% over the last 10 years, but the consumer goods firm’s share price performance has cooled recently, and Unilever’s share price is down by 13% from the all-time high of 2,862p we saw in May 2013.

Does this decline make Unilever a buy, or are the firm’s shares likely to fall further before recovering?

I’ve taken a closer look to find out more.

Should you invest £1,000 in Unilever right now?

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Pricey P/E

Let’s start with the basics: how is Unilever valued against its past earnings, and the market’s expectations of future earnings?

P/E ratio

Current value

P/E using 5-year average adjusted earnings per share

21.4

2-year average forecast P/E

18.2

Source: Company reports, consensus forecasts

Unilever shares haven’t been cheap for a long time, and they still aren’t.

The firm’s underlying growth and free cash flow compensates to this for some extent: Unilever’s dividend has been consistently covered by free cash flow in recent years (unlike most UK supermarkets, for example) and the firm’s 3.6% prospective yield in line with the FTSE 100 average.

However, Unilever’s sales fell last year, and profits are expected to fall this year. Is the Anglo-Dutch firm’s premium price tag still justified?

A closer look

Unilever’s first-half results were encouraging, with emerging market sales up 6.6% and the firm’s core operation margin stable at a very healthy 14%, despite turnover falling by 5.5% due to currency effects.

However, a year is a short time for a large firm like Unilever, and in my view it’s more important to look at the medium-term trends before deciding whether to buy or sell.

I’ve taken a look at some of the firm’s key fundamentals over the last five years:

Metric

5-year compound average growth rate

Sales

+4.6%

Adjusted earnings per  share

+2.6%

Dividend

+6.1%

Book value

+3.3%

Net debt

-2.8%

Source: Company reports

It’s a pretty well-rounded picture, in my view: shareholders have been well rewarded by a rising dividend, while the firm’s net debt has actually fallen by an average of 2.8% per year.

I don’t see anything to be concerned about here. Looking ahead, City analysts expect more of the same: current forecasts suggest both earnings per share and the dividend will rise by around 6% in 2014 and 2015.

Is Unilever a buy?

As a long-term Unilever shareholder, I’d be happy to top up my holding at today’s prices, but I do think that the company’s shares are a little expensive, even given their above-average growth prospects.

Unilever’s share price has fallen by 5% over the last three months — it’s possible that this fall might continue, providing an attractive buying opportunity later this year or early next year. 

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares in Unilever. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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