Shares in Unilever (LON: ULVR) (ULVR.L) took a tumble late last week, falling from around 4,550p on Wednesday, to close the week at 4,161p, a two-day decline of 8.5%. Today, the shares are down another 1% and have closed at 4,121p.
The driver of the share price fall last week was the company’s Q3 results released on Thursday morning. Unilever reported a 1.6% decline in turnover for the third quarter, including a currency impact of 5.1% as a result of a stronger euro. Underlying sales rose 2.6%, missing analysts’ estimates of 3.9%.
They say that shares take the escalator up and the elevator down, and that’s exactly what’s happened with Unilever.
Has the fall created an opportunity for dividend investors?
Core holding potential
Unilever is one of those stocks that everyone, myself included, wants to own.
The stock is perhaps not the ideal dividend growth stock for UK investors, due to the fact that the dividend is declared in euros. That means that the dividend payout for UK investors will fluctuate depending on the GBP/EUR exchange rate.
However, the company does have excellent ‘core holding’ potential, in my view. Unilever’s portfolio of brands is second to none, and as a result, the company is able to generate fairly consistent revenues, irrespective of economic conditions. Furthermore, strong exposure to the emerging markets provides a growth story going forward.
Because the stock is desired by both portfolio managers and private investors alike, it often trades at a premium valuation. For example, at 4,550p last week, Unilever was trading on a forward looking P/E ratio of 22.8, with a prospective yield of 2.8%.
In my opinion, there’s two ways investors can approach Unilever and its high valuation.
First, you can take the Warren Buffett / Nick Train approach and argue that it’s better to buy a wonderful company at a fair price, than a fair company at a wonderful price.
Alternatively, you can opt to just be very patient, in the hope of a significant short-term share price decline, and attempt to capitalise when sentiment is low.
Personally, I prefer to invest the second way. Almost every company suffers from a knock in sentiment at some stage. It’s just a matter of being patient enough.
So have Unilever shares fallen enough to warrant buying for the dividend?
3.1% dividend yield
Unilever’s metrics certainly look more attractive after a near 10% share price fall. The forward looking P/E has fallen to 20.6, while the stock’s dividend yield has risen to 3.1%.
However, personally, I’d like to see the stock fall a little further.
Looking at the chart below, Unilever has had an extraordinary run this year after the failed bid from Kraft in February.
From a dividend investing perspective, I’d like to see the stock fall back to the area I’ve marked with a blue circle. If I could pick up Unilever with a prospective yield of around 3.5%, that would get me interested.
Disclosure: Edward Sheldon, CFA has no position in Unilever.
This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.