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Is it time to buy Unilever shares?

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If I were an investor in Unilever (LSE: ULVR) stock, I would lose patience. Undoubtedly, performance has been mixed. Even including dividends, it has only returned about 1% over the past five years. So what’s wrong?

Good business, bad management?

Terry Smith and Nick Train are two of the UK’s most popular fund managers. Their funds also have large positions in Unilever and both have expressed disapproval of its management. Train described Unilever’s financial performance as “pedestrian“. Additionally, Smith also criticized management for focusing on revival issues.

A company that feels compelled to define the purpose of Hellman the mayonnaise has, in our opinion, clearly lost the plot. The Hellman The brand has been around since 1913, so one would assume that consumers have now understood its purpose (salty and sandwiches).

Smith advises the company to focus on getting the best version of Unilever possible. Not something different. Therefore, unsurprisingly, he criticized Unilever’s 50 billion bid to acquire GlaxoSmithKlines consumer healthcare sector earlier this year. The takeover was rejected because GSK believed the offer fundamentally undervalued it. Meanwhile, many Unilever shareholders have also failed to see the benefits of the deal.

Pricing power?

An important metric for evaluating business performance is return on invested capital. It is the amount of money a company can produce for every pound invested. For example, a return of 10% would mean that a company generates 10% of its net profit for every 100% invested in itself. Unilever currently produces respectable returns in the mid-teens. However, it was once capable of 20-25% returns. Can he come back to this level? Maybe, but probably not in the short term due to soaring inflation.

YearReturn on invested capital
200722.89%
200823.44%
200919.55%
201022.56%
201119.41%
201217.76%
201318.57%
201420.61%
201516.97%
201616.95%
201716.97%
201825.36%
201914.63%
202013.14%
202113.43%
Return on invested capital of Unilever, past 15 years

Unilever made more than 52 billion in revenue in 2021 (it reports in euros). Of its portfolio of more than 400 well-known brands, 13 have generated more than one billion euros. Impressively, a third of the world uses its products daily and has a distribution network capable of meeting global demand.

The huge demand for its products should give Unilever some pricing power, but the margin should still suffer. Input cost inflation was forecast at $2.1 billion in the first half and a further $2.7 billion in the second half. In response, Unilever raised prices by 8.3% in the first quarter, warning that further price increases were to come.

How far can Unilever raise prices before consumers seek out cheaper alternatives to Dove, Knorr and Hellman? The half-year results expected at the end of this month could provide some answers.

time for patience

The stock price has fallen more than 10% in the past year, bringing the price-to-earnings ratio from the mid-20s to around 19 today. Unilever shares are yielding an attractive 4%. Despite economic challenges and questionable management decisions, it has the foundations of a quality business. That’s why Train and Smith didn’t sell. I’m in no rush to buy, as inflation continues to squeeze the profit margin. If I had purchased earlier, I would hold on and be patient for now.

Sources

1/ https://Google.com/

2/ https://www.fool.co.uk/2022/07/04/is-it-time-to-buy-unilever-stock/

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