I think most investors recognise Nick Train as one of the UK’s highest-profile fund managers. He invests in many FTSE 100 stocks in his portfolios. Train manages the Finsbury & Growth Income Trust and the Lindsell Train Investment Trust, as well as other funds.
I should mention that one FTSE 100 stock he likes is Unilever (LSE: ULVR). So much so that as at the end of January, Train had over a 9% weighting in his Finsbury & Growth Income Trust portfolio. It shows me that this manager isn’t afraid of making big stock calls and highlights the strength of his conviction in the company.
But do I share this same level of enthusiasm on Unilever? In a nutshell, I wouldn’t hold the shares in my portfolio. Here’s why I reckon Train may be wrong about the FTSE 100 stock.
Strong brands
One of the reasons why Train likes Unilever is due to its portfolio of strong brands. There’s no denying the company’s impressive collection of consumer brands. Persil, Ben & Jerry’s, Knorr, Lipton, Dove and Vaseline are just some of them.
Unilever says that 2.5 billion people across the world use its products daily. To me, that’s impressive. I agree with Train that global brands such as Unilever owns offer the company durability and some permanence. But I think competition is growing, especially from smaller and cheaper brands.
In my opinion, consumers like value. If the smaller brands are offering a similar product for a cheaper price, it’s only natural that some will start using this instead. This means Unilever could have to compete more on price. To me, this is never a good thing as it could impact margins, thereby placing pressure on the dividend.
The dividend
Unilever is one of the FTSE 100 stocks that offers an attractive dividend yield of 3%. That’s why it’s a favourite among income hungry investors, like me. Even Train likes the dividend yield too.
Recently Unilever raised its quarterly dividend. I saw this as an encouraging move from the company, especially during the coronavirus pandemic. It also indicated to me that Unilever can pay investors an income for now.
But I’m somewhat uncomfortable about future dividend payments. If competition is increasing, margins are likely to be squeezed, which may impact future income, especially when Unilever’s growth has been sluggish over the past few years.
Sales growth
Even before Covid-19, Unilever was trying to improve its sales growth by focusing on emerging markets. It’s already established in the developed countries. But even Unilever’s business wasn’t immune from the pandemic. Its 2020 full-year profits took a huge hit.
Let’s be frank, this pandemic is not over yet. My concern is that lockdowns and government restrictions could persist, which could continue to impact Unilever’s business. This could also hurt profitability and thus the dividend.
Unilever has an ambitious target to deliver 3%-5% underlying sales growth per year in the long term. But I want to see some evidence of improving sales growth sooner. Unlike Train, I won’t be buying Unilever shares in my portfolio just yet.
