FTSE 100 share Unilever (LSE: ULVR) has been a remarkable success story for shareholders over many different timescales.
Ah, yes! Fast-moving consumer goods with powerful brands. It’s stories like Unilever’s that make the defensive, cash-generating consumer goods sector hallowed ground for long-term buy-and-hold investors the world over.
A compelling business model
The idea is that customers grow to love a company’s brands. They buy the product, use it up, come back for more frequently, and display almost religious loyalty to the firm’s offerings. Bingo! Incoming cash flow is predictable, constant and resilient to general economic downturns.
Next, the company pushes the brand into new territories and tries to get more and more people to buy it. Or it adds new brands either by organic development or y buying them in. The firm’s revenue keeps growing, profits keep growing, cashflow expands and the dividend keeps rising. Meanwhile, year after year, the share price keeps moving up.
It’s worked a treat with Unilever and its brands such as Knorr, Dove, Hellmann’s, Cif, Domestos, PG Tips, Surf and many others. For example, if you’d bought shares in Unilever when they were weak in the year 2000 you’d be up almost 500% on the share price at today’s level around 4,927p. On top of that, you’d have collected a stream of dividends rising a bit most years.
But buying the dips would have been a decent tactic ever since too. If you’d bought the weakness in 2004 you’d be up almost 400% today. If you’d bought in 2009 your shares would be nearly 300% higher, in 2014 and you’d be up just over 100%, and even buying 2018’s weakness would have given you a 30% gain by now.
Will the good times keep on rolling?
So, I ask the question, is Unilever the best share in the FTSE 100 because it’s been giving shareholders the kinds of returns normally associated with much smaller enterprises? Maybe, but past performance is no guarantee that future performance will continue in a similar manner.
One of the main difficulties for investors over the years has been that Unilever never really looked like a bargain. Its attractive qualities have been well appreciated by the market and getting in has always meant taking a bit of a leap of faith based on the quality of the enterprise and your long-term expectations.
As I write, for example, the forward-looking earnings multiple for the current year runs at just over 22 and the anticipated dividend yield is around 3%. That’s all right if we can be sure that the company will continue to grow, but a recent article from the Fool’s Owain Bennallack encouraged me to question such assumptions.
Owain argued that the latest generation of shoppers is used to shopping around and isn’t as loyal to brands as previous generations were. Yet firm’s like Unilever seem to be coveted by investors more than ever judging by their valuations. Maybe the whole sector will come crashing back down to earth soon.
Unilever has indeed been arguably the best or one of the best shares in the FTSE 100 but will it continue to be? Over to you.
