Unilever (LSE: ULVR) shares have fallen since the start of 2021. But, Nick Train, one of the UK’s highest profile fund managers still likes the stock. He holds it in his Finsbury & Growth Income Trust portfolio. In fact, as at 31 January 2020, Unilever shares makes up 9.2% of the investment trust.
So if Train likes the company, does that mean I should buy the stock in my portfolio? I’m not really convinced by Unilever’s investment case, but I’ll keep my eyes on the stock. Here’s why.
Competition is increasing
Let me start by mentioning that Unilever operates under three divisions including beauty & personal care, home care, and food & refreshments. I think it has some of the best consumers brands. Persil, Ben & Jerry’s, Knorr, Lipton, Dove, and Vaseline are just a few of them.
Unilever states that 2.5bn people across the world uses its products everyday. To me, that’s impressive. The global nature of its brands means that Unilever’s portfolio has some durability. But competition is increasing, especially from smaller and cheaper brands.
This means that Unilever may have to compete over price. In my opinion, this is never a good thing. I reckon this could squeeze the company’s margins, which in turn may place pressure on the dividend. Especially when revenue and profitability growth has been limited over the past few years.
Unilever shares currently offer an attractive dividend yield of 3%, which makes it a favourite among income investors. The company recently raised its quarterly dividend. But the increasing level of competition and potential margin and dividend squeeze makes me somewhat uncomfortable holding the shares in my portfolio.
Unification
Unilever has recently completed a legal unification. This means that, unlike before, it now operates under a single parent company called Unilever PLC. But what does this mean for the shares?
Well, I reckon it acts as a springboard for future growth. I think a simpler legal structure makes things like disposals and acquisitions easier. Rather than dealing with multiple companies, it will deal with one entity.
This all makes sense to me but I’d like to see some evidence first. Unilever has announced that it will sell its tea business, which has only been growing in the low single-digits. To me, it’s rational to get rid of something that hasn’t been helping overall growth. For now, I think I’ll continue to monitor Unilever shares to see some evidence that the simple unified legal structure works.
Covid-19
Even before the coronavirus pandemic struck, Unilever’s sales growth had been sluggish. It’s well established in the developed countries but it had been focused on expanding sales in the emerging markets. But even Unilever’s business wasn’t immune from Covid-19.
Earlier this month, Unilever reported a modest increase in its 2020 full-year sales. But I think the shares took a hit because profitability declined significantly. E-commerce grew by 61% and now online sales count for 9% of sales.
While vaccines are now available, this pandemic isn’t over yet. My concern is that lockdowns and government restrictions could persist, which could hinder Unilever’s business. This could also impact the dividend.
In my opinion, Unilever has an ambitious target to deliver 3%-5% underlying sales growth per year in the long term. I’d much rather see some improvement on the sluggish growth before buying the stock.