The Unilever share price has dropped back. Should I buy?

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The Unilever (LSE: ULVR) share price has dropped back to around 4,068p from about 4,360p on 16 July. So does that decline of almost 7% make the stock more attractive for me?

On balance, it does. I like Unilever’s strong position in the fast-moving consumer goods sector. However, one criticism often mentioned by investors is the valuation usually looks too high.

The Unilever share price has been sliding

But I think the stock market has been trying to address the situation. For example, a year ago, the Unilever share price was as lofty 4,700p. And there’s no doubt the stock has been trending lower since then. But part of that adjustment lower could be because the euro has been weakening against the pound over the period. And Unilever reports its earnings in euros.

But even now the valuation looks quite pricey. At the current 4,068p, the forward-looking price-to-earnings multiple is around 18 for 2022. But City analysts expect earnings to increase that year by just under 7%. And one rule of thumb I like to use is to compare the forward-looking earnings multiple by the growth rate. To me, fair value occurs when both are similar figures. But there’s a big difference between Unilever’s expected growth of 7% and its forward-looking multiple of 18.

It would be easy for me to write off Unilever because of over-valuation. But some businesses have earned higher ratings. Often, great companies bear a high rating and it acts as a mark of quality. I think Unilever is a business like that.

The company scores well against quality indicators. For example, the operating margin is running near 16%. And the business is also achieving impressive double-digit percentage returns against invested capital and equity. Meanwhile, the steady, multi-year records of incoming cash flow and shareholder dividends are impressive.

Powered by strong brands

I’m not underestimating the power of Unilever’s brands in areas such as food, beauty, home & personal care. And those brands have driven a decent performance over the past decade. Indeed, the Unilever share price has responded well to 10 years of annual incremental increases in earnings and cash flow. In 2011, the stock was near 2,000p. So the more-than 100% increase since then will have combined with dividends to produce a decent investment outcome for shareholders.

I’m optimistic the Unilever share price can do well over the coming decade. And I expect operational progress to drive the gains. However, nothing’s certain. The company may find it harder to achieve advances in earnings. And if that happens, the share price could slip lower and the earnings multiple could contract.

However, chief executive Alan Jope said in July’s half-year report that growth is the company’s “priority”.  He’s “confident” the business will deliver underlying sales growth in 2021 “well within our multi-year framework of 3-5%.”

I reckon the Unilever growth story is far from complete. So I’d embrace the risks and buy some of the company’s shares to hold in my long-term diversified portfolio.

The post The Unilever share price has dropped back. Should I buy? appeared first on The Motley Fool UK.

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More reading

  • The Unilever share price (ULVR) is falling. Here’s why it’s on my August shortlist
  • Why the Unilever (#ULVR) share price could continue to struggle
  • Fundsmith’s Terry Smith would buy stocks like this to beat inflation
  • Why did the Unilever share price plummet this week?
  • The ULVR share price crash: should I buy more?

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.