Unilever (LSE:ULVR) has had a torrid couple of years. At the time of writing, the FTSE 100 constituent’s share price is down close to 14% YTD. The FTSE 100 index is up over 10% in that time and while many other large-cap companies have seen a recovery in their share prices since the pandemic, the consumer goods giant is within 1% of its March 2020 pandemic lows.
Let’s take a look at what’s holding back the share price and whether this represents a buying opportunity for my portfolio.
Not everything is going wrong
Unilever is facing significant input cost inflation. Prices of raw materials such as palm oil, packaging, freight and global distribution costs are surging. In Unilever’s half year results, CEO Alan Jope warned that due to inflation, operating margin expectations had fallen from 19.8% to 18.8%.
While Unilever struggles to navigate the global economic, social and political landscape, it’s not all doom and gloom. Here’s a couple of reasons why:
Firstly, Unilever is in the middle of a €3bn share buyback scheme this year, which demonstrates the company’s healthy cash flow. The theory behind share buybacks is that as the number of shares available in the market fall and with all things being equal, there should be an increase in the earnings per share. I believe this will create a level of support for the share price.
Secondly, the company is seeing attractive growth in nutrition, beauty and personal care products. I’m particularly interested in how the company has been expanding its plant-based meat and dairy alternatives business, having acquired The Vegetarian Butcher and expanding its vegan offerings across its brands. The company supports calls for worldwide animal testing bans on cosmetics and is exploring alternative sources of food protein to tackle the combined issues of feeding a growing global population and the unsustainable impact of traditional farming. As an ESG investor, these are all positives for me.
Too cheap to ignore?
There is no doubt that soaring inflation could hit Unilever hard. The question is whether the company will be able to pass the majority of the input cost increases on to its customers. With powerful and popular brands such as Ben & Jerry’s, Hellmann’s and Persil, I believe they have the pricing power to counter inflation.
Unilever is certainly not alone in facing rising inflation and hits to profit margin but it’s interesting to see that its competitors’ share prices have been significantly less punished by the market. General Mills, Johnson & Johnson, Mondelez International, Nestle SA and Proctor & Gamble have all seen their share prices rise between 2 and 10% year to date. I believe that Unilever have just as much pricing power as its competitors and comparably I believe the FTSE 100 constituent offers value. But is the share price cheap?
The fall in share price is creating an increasingly attractive yield, now approaching 4%. And this is a safe and covered dividend, which has increased eight times in the past 10 years.
Meanwhile, the forward P/E ratio currently stands just above 17, which looks attractive to me. While I think that large chunks of the market and especially Unilever’s competitors look expensive, I see this as an opportunity to be able to buy a solid FTSE 100 company at a discount.