Unilever (LSE: ULVR) (NYSE: UL.US) has been a solid performer for years, and it’s at the heart of many a good long-term portfolio. But I’ve been bearish on the shares for some time. Why?
Well, first lets take a look at the last five years’ performance together with forecasts for 2013 and the next two years:
| Dec | Pre-tax | EPS | Change | Dividend | Change | Yield | Cover |
|---|---|---|---|---|---|---|---|
| 2008 | £7,129m | 143p | +8% | 77.00p | 4.9% | 1.9x | |
| 2009 | £4,916m | 121p | -15% | 41.06p | -47% | 2.1% | 2.9x |
| 2010 | £6,132m | 141p | +16% | 81.90p | +99% | 4.2% | 1.7x |
| 2011 | £6,245m | 146p | +4% | 93.14p | +14% | 4.3% | 1.6x |
| 2012 | £6,683m | 161p | +10% | 97.22p | +4.4% | 4.1% | 1.7x |
| 2013(f) | £5,562m | 130p | -2% | 88.90p | -8.6% | 3.6% | 1.5x |
| 2014(f) | £5,830m | 135p | +3% | 92.71p | +4.3% | 3.8% | 1.5x |
| 2015(f) | £6,366m | 147p | +9% | 99.68p | +7.5% | 4.1% | 1.5x |
Now, that’s really not a bad record, and it can probably be expected to continue for decades due to the nature of Unilever’s business — the owner of so many billion-dollar brands, including Dove, Flora, Knorr and Lipton, in addition to a couple of hundred other popular brands around the world, is always going to be selling lots of stuff.
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That’s partly why Unilever shares did so well during the recession — they’re a relatively safe investment during hard times when there’s a “flight to quality” on. But that’s also helped make me bearish on the shares for 2014, as I think the past few years has made them too expensive now.
Back in 2008, Unilever shares ended the year on a price-to-earnings (P/E) ratio of a bit over 13, with a dividend yield of 4.9%, and they were attractive then — the P/E was lower than average, and the yield was significantly higher.
Today’s valuation
But wind forward to the situation facing us at the end of December 2013. We don’t have the results yet, but the analysts’ consensus is probably about right. And it puts the shares on a P/E of over 18, with that dividend yield down to 3.6% — and it takes two more years to get the P/E back down as low as 16.
I’ve been watching Unilever as a possible Beginners’ Portfolio candidate for some time, and if I’d added it in the early days we’d be in profit with it now as the price continued on upwards after I first rejected it as overvalued.
But after peaking around 2,885p in April 2013, Unilever shares have been falling in what I’ve always seen as an inevitable correction once the economic storm clouds started to clear.
Still overvalued?
The question that remains is whether there is any further correction to come. And though quality companies often command above-average valuations over the long term, I think the answer to that is yes.
Verdict: Nice company, shame about the price!
