As a value investor and income-seeker, I’m always searching for quality companies with weakening share prices. That’s because the daily movements of the stock market are often uncorrelated with underlying company performances. As Benjamin Graham remarked and Warren Buffett repeated: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.” Even shares in FTSE 100 heavyweights can get pushed around by the public’s voting machine until the weighing machine eventually gains the upper hand.
A FTSE 100 hero
My investing decisions are also shaped by another Warren Buffett quote. The Oracle of Omaha advised: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” That’s why I’m drawn to shares in the great blue-chip businesses of the FTSE 100.
My latest FTSE 100 ‘hero share’ is (I think) safe, boring, and has delivered market-beating returns to its shareholders for decades. This quality company is Anglo-Dutch business Unilever (LSE: ULVR). For patient and long-term investors, owning shares in this global leader in FMCG (fast-moving consumer goods) has been highly rewarding. Unilever is a maestro at selling us brands that fill up our kitchen and bathroom cupboards. Well-known Unilever brands include Domestos bleach, Dove soap, Lipton tea, Lynx and Sure deodorants, Ben & Jerry’s ice cream, and Persil laundry detergent.
During 2020’s global lockdowns and restrictions, Unilever enjoyed a sales boost, particularly in hygiene & cleansing and at-home foods. Yet its shares have completely missed the FTSE 100’s relief rally since news of effective Covid-19 vaccines broke in November. At their 2020 high, Unilever shares peaked at 14 October. Today, they trade at 4,425p, down 519p from this high. That’s a fall of over a tenth (10.5%) in just over three months, for no good reason I can discern.
A quality stock at a 10% discount
At 4,425p a share, Unilever is valued at £117.1bn, making it #1 in the FTSE 100 by size. What’s more, this company’s excellent management rarely puts a foot wrong, driving the group to grow and thrive. Next month, I’m expecting this business to release an excellent set of 2020 results, building on three good quarters earlier. Yet shares in this global giant are by no means expensive. Also, they offer an attractive cash dividend to income-seeking investors like me.
At 4,425p, this stock trades on a price-to-earnings ratio of 22.4 and an earnings yield of 4.5%. That’s not cheap for a FTSE 100 stock, but I feel it’s worth paying extra for class. Furthermore, Unilever’s current dividend yield of 3.3% is a tenth higher than the FTSE 100’s 3%. Even better, Unilever has never cut its dividend for the past 38 years. Indeed, it has grown at an average rate of 8% a year since 1982. Thus, on average, Unilever’s dividend has doubled every nine years for nearly four decades. That’s a fantastic performance and one that stands out among large-cap stocks.
Of course, Unilever’s growth could slow or even reverse, which could affect its ability to pay dividends. This might also negatively impact on its share price. But I’m prepared to take that risk.
Yesterday, I wrote about a new income portfolio that I’m planning. My aim is to generate an extra £12,000 a year in passive income from share dividends. I aim to include Unilever in this portfolio, ideally inside my ISA.