Should I Buy Unilever?

Published in Company Comment on 12 October 2012

Harvey Jones weighs up Unilever (LSE: ULVR).

It's time to go shopping for shares again, but where to start? Energetic high-yielder SSE (LSE: SSE)? Cut-price Tesco (LSE: TSCO)? Or bounce-back brand Burberry (LSE: BRBY)?

There are plenty of great stocks to choose from, and I'm enjoying doing some window shopping. So here's the question I'm asking right now. Should I buy Unilever (LSE: ULVR) (NYSE: UL.US)?

Soft soapers

Over the last two years, consumer goods giant Unilever's share price has grown twice as fast as the FTSE 100 (UKX). Who wouldn't want to take a bite of that?

Unilever has been a firm Fool favourite for years. It's a strong, solid company, with a smorgasbord of food brands, including Liptons, Knorr and Ben & Jerry's, and a cupboard full of household goods, including Persil, Omo, Vaseline and Dove soap. There is absolutely no way you don't have several of its 400 products in your own home so, in a way, we all own a piece of Unilever. The question is, should I buy its shares as well?

Brylcreem boys

Unilever isn't just stocking kitchen cabinets in Europe and the US, it is spreading into emerging markets. A mighty two billion people use its products every day. It may be listed on the FTSE 100, but it is a truly global stock.

Unilever's global diversification gives it great resilience. While its European markets have caught a financial cold, China and Asia administered a healthy dose of investment vitamin C. In July, Unilever shrugged off the summer snuffles to post healthy second-quarter results. Turnover rose 11.5%, underlying sales grew 5.8%, and pre-tax profits rose 1%. Investors perked up. Unilever's share price hit an all-time high.

To Hellmann's and back

Growing market share, successful brand building and five years of rising profits, sales and dividends. What's not to like? Unilever remains bullish, claiming it can double its sales by focusing on emerging markets, notably China and Eastern Europe.

The problem is that at its current share price, it needs to serve something special to investors. Unilever currently trades at a pricey forecast price-to-earnings ratio of 18 times earnings for December, which is why most analysts now label it a 'hold' rather than a 'buy'.

Surf dudes

If Unilever is already in your portfolio, you will be holding it close to your heart and cherishing that cheeky 3.3% yield. But should the rest of us make a play for it?

I'm impressed by its pricing power. Unilever increased both prices and sales in the first quarter of this year, no mean feat as consumers retrench. People still need Domestos, even in the recession.

I'm also impressed by the fact that it has kept growing, while rivals Danone and Procter & Gamble (NYSE: PG.US) have struggled. And since emerging markets already make up more than half its business, doubling that figure should produce a powerful return.

Unilever is a great company, and it's on a roll. But trading close to its 52-week high, my worry is that new investors won't clean up.

One stock on Buffett's menu

If Unilever doesn't tickle your taste buds, there are plenty of other sizzling stocks out there, including the one UK share that Warren Buffett loves.

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Further Motley Fool investment opportunities:

> Harvey doesn't own shares in any company mentioned in this article. The Motley Fool owns shares in Tesco, and has recommended shares in Burberry.

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Comments

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YeeWo 15 Oct 2012 , 11:37am

4 dividends a year, a decent ROCE; yes the SP is at a 52 week high but no rational reason exists for the SP to not keep growing. If you buy Unilver stock and reinvest the dividends, over time, I have no doubt whatsoever that you will do far better than staying in cash!!

Also think of all those revenues the company earns in currencies beyong Sterling........

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