Open any cupboard in your street and the chances are you’ll find some Unilever (LSE: ULVR) products inside. From Marmite to Magnum and Cif to Dove, the consumer goods giant has a strong presence in many homes. That’s not just true in the UK: with over 400 brands, Unilever products are used daily by over 2.5bn people around the world. But over the past year, the Unilever share price has fallen by 18%. I think that could be a buying opportunity for my portfolio. Here’s why.
Why I like Unilever
The investment case for Unilever is fairly simple. The company’s portfolio of premium brands gives it pricing power. That should allow the company to keep making substantial profits. Last year, for example, it recorded over €6bn of post-tax profits. Its global footprint means that it can benefit from growth in developing markets. It also reduces the risk of a downturn in any one country hurting total company results.
By focussing on everyday products that are frequently used, the company has been able to build a recurring stream of customers. Once its advertising prowess has attracted someone to a shampoo or detergent, often Unilever will reap the rewards of their loyalty over years or even decades, as customers keep coming back for products they like and trust.
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So while it might not have very exciting growth prospects, I see Unilever as a company that could reward me over the long-term due to its product mix and well-established brand portfolio.
The Unilever share price
But if the company is as attractive as I think, why has the Unilever share price been falling? Am I missing something that worries other investors?
Certainly the company faces risks, which are weighing on Unilever’s appeal in the stock market. Rising ingredient costs could hurt profits. The company has been trying to pass these onto customers in the form of price rises. The company’s third-quarter results this week suggested good progress on this front. But inflation remains a risk. If it increases prices too much, the company could lose customers – but if it doesn’t, it may need to swallow ingredient inflation in the form of lower profit margins.
In the long term, I expect the company’s strong stable of brands to remain in demand. So I think the current Unilever share price looks attractive. Unilever shares are yielding 3.8%, which for a company of its size I find attractive. Beaten down competitor Reckitt, for example, is yielding only 3.2%.
The company’s price-to-earnings ratio is around 18. I wouldn’t say that’s cheap, but I think it’s good value for a company of Unilever’s quality. With billions of customers, it should be able to grow earnings for the foreseeable future if it manages its business well. Buying shares would give me exposure to that enormous market opportunity.
So, I see the current Unilever share price as a buying opportunity. I am considering adding it to my portfolio.
