As an investment, consumer goods giant Unilever (LSE: ULVR) (NYSE: UL.US) has an extremely strong track record — but as I’ll explain, there are a few short-term risks investors need to be aware of.
1. 170%
The FTSE 100 reached an all-time closing high of 6,930 on 30 December 1999, more than 14 years ago. It has yet to close above this level again — but over the same 14-year period, Unilever’s share price has risen by 170%.
This highlights the low-risk, high-return opportunities that are sometimes available in the big cap sector. Back in 1999, Unilever was out of favour, and was not the impressive growth machine it has since become — but investors who trusted that market forces would drive out the value in the stock have been well rewarded.
2. -6.3%
Unilever’s does business in a wide range of currencies, but reports in euros. This means that the firm’s reported results don’t always reflect sales trends.
For example, in the first quarter of this year, Unilever’s reported turnover fell by 6.3%, despite a 3.6% rise in underlying sales. The fall in turnover was due to a negative currency impact of 8.9%, according to the company — a hefty blow.
In my view, shareholders don’t need to worry too much about this. Fluctuating exchange rates are a normal part of business for multinational firms, and the effects tend to be neutral over the long term.
3. -3.8%
However, there is one area in which currency headwinds can affect shareholders directly — dividend payments.
Unilever’s dividends are declared in euros, and the growing strength of the pound against the euro last year meant that Unilever’s fourth quarter payout was 3.8% lower than its second quarter payout, despite the firm’s quarterly dividend having remained unchanged (in euros).
This problem isn’t unique to Unilever, and it’s worth remembering that the situation can also reverse to work in your favour — although the effect is most likely to be neutral, over the long term.
Is Unilever a buy?
Unilever isn’t cheap; the firm’s stock currently trades on a 2014 forecast P/E of about 20 and offers a prospective yield of 3.5%.
In my view Unilever remains a buy for income only — investors seeking a repeat of Unilever’s performance over the last 14 years need to look elsewhere, for companies that are out of favour today, as Unilever was in 2000.