Image source: Getty Images
Shares in mighty conglomerate Unilever (LSE: ULVR) have dropped 8% from their 10 September 12-month high of £50.34.
The stock has long been a mainstay of many a portfolio, so is this the time for me to buy it?
Is it worth me buying for the dividend?
Since I turned 50 a while ago I have focused on stocks with a 7%+ dividend yield. I intend to increasingly live off these returns as I continue to reduce my working commitments.
The minimum figure of 7% factors in the additional risk involved in share investment compared to the alternative ‘risk-free rate’. This is the yield of the UK 10-year government bond, which currently stands at around 4.6%.
In 2024, Unilever paid a total dividend of €1.75, giving a sterling equivalent of £1.49. On the current share price of £46.18 this generates a yield of 3.2%.
Consensus analysts’ forecasts are that the dividend will rise to £1.55 this year, £1.64 next year, and £1.85 in 2027. These would give respective yields on the current share price of 3.3%, 3.5%, and 4%.
These are nowhere near my minimum requirement for a dividend stock. So, I would not buy it based on its dividend yield.
What about its share price potential?
That said, I do also hold – and occasionally buy – stocks geared to share price growth as well.
For these I tend to look for a minimum undervaluation in a share price, compared to its fair value, of 20%.
This is because it is not an effective use of my capital when many other stocks are significantly more undervalued.
Looking at the key stock price measurements first, I note Unilever’s 23.7 price-to-earnings ratio is overvalued compared to its peers. These average 21.7, and comprise Johnson & Johnson at 17.1, Nestlé at 20.1, Reckitt Benckiser at 24.5, and Procter & Gamble at 25.
It is also overvalued on its price-to-book ratio of 6.8 compared to its competitors’ average of 5.9.
That said, Unilever’s 2.2 price-to-sales ratio looks slightly undervalued against its peers’ average of 3.4.
To get to the bottom of its valuation, I ran a discounted cash flow (DCF) analysis. This pinpoints where any firm’s share price should be trading, based on cash flow forecasts for the underlying business.
In Unilever’s case, the DCF shows it is 15% undervalued at its present £46.42 share price. Therefore, its fair value per share is £54.61.
So, it does not meet my minimum criteria for a share price growth-oriented stock either.
My verdict
Neither the dividend yield nor the share price undervaluation meet my minimum requirements for me to buy the stock.
Even its current lacklustre appeal to me is lessened by the risk posed by its main competitors. This could see its margins squeezed over time.
Its 2024 GAAP results only reinforced my bearish view of the stock. These saw net profit drop 10.8% year on year to €6.4bn on a 0.1% drop in turnover to €14.2bn.
Consequently, I will not be buying the stock any time soon.
