Unilever (LSE: ULVR) is a popular stock and one of the points that’s attractive about it is its dividend. At the current price, the shares come with a 3.6% yield, which isn’t bad going. But that alone isn’t enough for me. I’m looking for the Unilever share price to have strong growth prospects as well and I’m not sure that it has at present.
The consumer goods giant delivered its interim results last week, which I’ll cover shortly.
But before I do, I have to say that I won’t be buying. Despite that 3.6% yield, Unilever shares already trade on a price-to-earnings ratio (P/E) of 19x. They’re not cheap. I think there are better stocks I could buy with higher dividend yields, such as Aviva. This has a current dirt-cheap P/E of 7x and pays out income of almost 7%.
Half-year results
We got a mixed statement from Unilever last week. Revenue for the latest six-month period jumped by 5.4% but its profitability took a hit. The operating profit margin for the period fell from 19.8% to 18.8%. The company blamed this on cost inflation and investment in its brands.
The firm has high exposure to emerging markets, and sales grew by 8.3% during the half-year. It was driven by the recovery in China and South Asia. Revenue growth in developed regions, such as North America and Europe, improved too.
Growth strategy
Unilever has stepped up its investment in its brands. But it’s also growing by buying businesses too.
It’s focusing on developing its portfolio in the higher-growth space, which includes skincare. This makes complete sense to me. So it has acquired Paula’s Choice, a digital-first brand that has created jargon-free and cruelty-free skincare products. I expect more acquisitions to be made over time.
As announced in April, it has separated out a number of smaller beauty and personal care brands under the name Elida Beauty, which has its own dedicated management team. This small group generated sales of €600m in 2020. And Unilever has indicated that it’s “exploring options for these brands with a focus on maximising value creation”.
No time for tea?
It’s not only some legacy beauty brands that the FTSE 100 company is having second thoughts about. It’s due to complete the separation of some of its tea brands in October. So what’s going to happen now? Well, it’s exploring the options for the next phase of this combined business, which it expects to be either an Initial Public Offering, sale or partnership. I guess the firm will provide more information on this when it next reports later in the year.
My verdict
I’ve placed the stock on my watch list. Cost inflation is my concern. This increased in the second quarter and is likely to hit future profitability, and thereby the Unilever share price. In fact, the company said that the issue has created “a higher than normal range of likely year-end margin outcomes”.
In plain English, this means uncertainty. I’m not comfortable buying the shares right now. But the firm did say that it expects to maintain its underlying operating margin for 2021. I’m happy to wait and see if this happens.
