As an investor in Unilever (LSE: ULVR), is my investment going anywhere? Over the past year, the Unilever share price has fallen 3%. In a way that is not surprising. Spiralling inflation and its possible negative impact on profitability have frightened investors away from consumer goods companies.
But what I find more alarming is that, over the past five years, Unilever shares have basically been flat. They are just 2% higher now than they were exactly five years ago, in the week when Warren Buffett was part of a takeover bid for the company.
That flat performance does not sound attractive to me – what is going on?
Flat revenue but growing earnings
I think the main reason Unilever shares have barely moved is that the company does not have an exciting growth story to motivate shareholders. In its final results last week, revenue grew 3.4% compared to the prior year. But it was still slightly down on where it stood five years ago. The company looks like a supertanker, large but going nowhere fast.
Cost control and a focus on profitability have helped improve earnings. Direct comparisons are complicated by the company’s shifting measures, but diluted underlying earnings per share of €2.62 compared favourably to diluted earnings per share of €1.88 five years ago.
Dividend rise
It is also worth remembering that Unilever pays a dividend. So while the shares have seen limited capital gain over the past five years, shareholders have at least benefitted from receiving a regular dividend.
Currently the yield is 3.8%. I think that is quite attractive. Rival Reckitt yields 2.8% and I think Unilever has a more attractive business overall. Last week, Unilever announced that its annual dividend would increase by 3%. That is not massive, but it is more than tokenistic. With its proven ability to generate massive cash flows and a yield close to 4%, the passive income potential of Unilever helps it merit a place in my portfolio.
Possible drivers for the Unilever share price
The company’s collection of premium brands and global footprint make it an attractive business. After its own failed attempt to bid for part of GlaxoSmithKline recently, I would not be surprised if Unilever itself became a bid target at some point. Warren Buffett – not someone associated with overpaying for companies – offered £40 a share. Today, Unilever shares continue to languish beneath that level.
But I would not buy a company just because I think it could attract takeover attention. Unilever has fiercely maintained its independence. What I like about Unilever is its business. A portfolio of premium brands give it pricing power. That can help generate large free cash flows, even at a time like now when cost inflation threatens profit margins. The pricing power allows Unilever to offset that risk by increasing what it charges customers.
There are risks to the Unilever share price, too. Its global business means exchange rate movements could hurt its profits. Its lacklustre growth momentum suggests it may struggle to grow revenues strongly. It is targeting underlying sales growth of 4.5%-6.5% this year.
But I continue to see this as an attractive business with a strong competitive advantage in the form of its brand portfolio. Earnings have grown along with the dividend. I do not see my Unilever shares as dead money, because I remain modestly optimistic about the company’s prospects.