When I last wrote about Unilever’s (NYSE:UL)(NYSE:UN) performance in February, I said that the stock was a tad too pricey, and I recommended to wait for a correction. At that time, shares traded at $43, and ultimately climbed to an all-time high of nearly $49 at the beginning of September.
Suddenly, the picture has changed again, and after a 20% correction, shares are now trading below $40. Only two months before the next dividend hike, Unilever has become a buy for me again.
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Reasons for the recent correction
I believe there are four factors which can be blamed for the price drop, but none of them has anything to do with the company’s fundamental performance.
The first reason which influences the share price for US investors is the strength of the dollar. Unilever shares are dual-listed in Amsterdam and on the London Stock Exchange. Although, the dollar essentially stands where it was at the beginning of the year, foreign exchange effects are part of the explanation why the stock gained in summer and is cheaper now. The Euro started to appreciate at the beginning of March and held fairly well until the end of September. However, since early October, the dollar strengthened again and has gained 5% since then.
A second aspect, which is also currency related, is Unilever’s exposure to the British pound. Unilever reports in Euros, but the UK is an important market for the company. Shortly before Unilever released its Q3 trading statement, reports about a dispute between Unilever and Tesco became public which led to concerns that the Brexit would hurt Unilever’s profitability. Unilever has reportedly attempted to raise the price for certain imported goods by around 10% in order to compensate the weakness of the British pound.
Third, Unilever shares did not respond well to the company’s Q3 figures, as underlying sales growth slowed down in the third quarter.
Finally, after the US election, the market preferences have changed, and certain sectors seem to be out of favor now, among them consumer staples.
Due to the dollar’s regained strength and the other factors described, Unilever can be bought at a 2-year low. This is another example that investment in foreign stocks is always associated with a currency risk, and each investor needs to decide whether he or she is willing to take that risk, but if the answer is yes, it makes more sense to buy in times when foreign currencies are weak.
Wait, what about P&G…?
Since Unilever is not the only major consumer goods company in the world, it makes sense to take a look if better alternatives can be found. A comparison between Unilever and stalwart Procter & Gamble (NYSE:PG) is more than obvious, and before deploying new money, I always look whether P&G might not be the better choice.
In terms of business performance, I favor Unilever as top and bottom line growth was higher than P&G’s in recent years, even when currency headwinds are eliminated. Secondly, I consider Unilever to be in a better position to capture growth, particularly as long as P&G remains occupied with itself and keeps focusing on divestitures and brand consolidation. I recently wrote an article which I believe illustrates quite well how Unilever has become more innovative than P&G.
Looking at the bare figures, noticeably share price, valuation, dividend and dividend growth, I can only conclude that Unilever is my favorite pick.
In the 52-week comparison, P&G clearly outperformed Unilever with a return of 10% versus a loss of 8% for Unilever. However, one should notice that P&G just started its recovery from a multi-year low last autumn and also take the aforementioned exchange rate effects into consideration.
Due to the diverging shares prices, Unilever’s valuation came down and the dividend yield went up.
Unilever’s FY16 PE stands at 19.5, and based on next year’s analyst consensus, the FY17 PE comes down to 18.0. P&G’s PE for FY16 (which ended on June 30) is 22.7 and 21.4 for FY17.
Unilever’s dividend yield went up while P&G’s went down. Since October, Unilever’s dividend yield (TTM) is higher than P&G’s for the first time since 15 months.
Higher dividend growth is the next reason for me to favor Unilever. P&G pays a quarterly dividend of $0.6695, which was raised by only 1% from $0.6629 in April 2016, far less than the 3% increase in the year before. Unilever typically announces the new dividend together with the release of the full-year results in January. In the last few years, Unilever constantly increased the dividend by 6%, and I count on a similar raise next year.
Unilever remains one of my long-term core holdings, and I have used the current weakness to buy more shares. Fundamentally, there is nothing to complain about, so when the market offers you an opportunity, why not grab it? Unilever’s business continues to outperform with organic top line growth ahead of competition. A starting yield of 3.6% with the outlook of stable dividend growth makes Unilever an attractive pick today.
Fuente: Seeking Alpha
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