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Any investor who has backed the Unilever (LSE: ULVR) to recover from its recent problems requires patience. It's been done wrong for years.
Actions in the FTSE 100 The consumer goods giant is down 5.44% in one year and 3.82% in five, spreading misery wherever they are. As a self-proclaimed contrarian, I saw this as a buying opportunity, but it hasn't been a good one yet.
I had wanted to buy Unilever shares for years as they regularly outperformed the FTSE 100, but decided they were too expensive to trade at a price-to-earnings ratio of around 24 or 25 times, yielding a modest 2.5% or so. .
Finally it looks cheap.
I finally bought it on June 7 of last year, at a P/E of around 17 or 18 times earnings. The share price almost immediately dropped another 10% and hasn't risen since. Friday was a rare exception, as stocks rose 2.69% as investors cheered Chinese plans to revive its leading stock market with a $278 billion stimulus package.
I'm not the only one who suffers. Renowned buy-and-hold fund manager Nick Train has Unilever in his Finsbury Growth and Revenue Trust's concentrated portfolio of UK shares. It's one of the reasons it has performed poorly.
The train owns the shares. “for the participation it offers to the growing disposable income of
the middle classes in emerging markets, especially India,” and for his “Many brands loved by consumers in the developed world, from Magnum to Marmite”. Guess what, Nick, that's why I bought it too! Great minds, huh?
Or maybe not so well, since the board of directors has made a series of unforced errors. These include an unfortunate pursuit of the FTSE 100 pharmaceutical company. GSK; a controversial foray into “Brands driven by purpose”which Fundsmith Equity manager Terry Smith publicly mocked as “ridiculous” (although others applauded him for this at a time when more consumers are aware of “ethical” brands); legal disputes over Israel with Ben & Jerry's; and a regulatory investigation into the company's green claims.
I'm taking the long view
I bought Unilever hoping it would get going, but these things don't happen overnight as Marks and SpencerThe long change of course is noticeable. It now has a new president, CEO and CFO, and Train hopes “The focus on growth and profitability they have promised will drive Unilever's business and share price performance”. Train believes things should improve once input cost pressures ease and interest rates fall, and that's what I believe too.
There are some positive signs, with underlying sales growing 5.2% year-over-year in the third quarter, roughly in line with the board's full-year target. Unilever remains cheap by its own standards, trading at 16.98 times earnings. The yield has risen to 3.86%.
I have said for years that my strategy is to buy good companies at discounted prices when they have fallen out of favor and wait patiently for them to recover. Selling Unilever would abandon that fundamental investment principle, so I'm not going to do it. I'll stick with my stock picks, just like Nick Train is doing. Now let's look at some of that growth and profitability, please.
