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1 Great Dividend Stock Down 27% to Buy Now, Almost a Once-in-a-Decade Valuation

Unilever (NYSE:UL) is a massive consumer goods giant that owns some of the world’s most recognizable brands, including Dove, Axe, Vaseline, Knorr and Ben & Jerry’s. With this arsenal of hot items in the consumer staples sector, the company is a perfect example of a staple stock that can be the cornerstone of any portfolio.

With a beta of 0.45, Unilever is a more stable share than the market. Despite being seen as a flight to safe investment, Unilever could offer investors total returns that beat the market over the next decade.

This stock is down 27% from its all-time high, trades at a once-in-a-decade valuation, and pays a hefty (but safe) 3.9% dividend yield. This is why Unilever looks like a buy right now.

Unilever’s portfolio of powerful brands

Unilever is home to more than 400 brands sold in 190 countries. The company categorizes its operations into the following five business segments, with a few examples of each:

  • Beauty and well-being (21% of turnover): Dove hair and skin care, Sunsilk, TreSemmé and Clear hair care, along with Pond’s and Vaseline skin care.

  • Personal care (23% of turnover): Dove body wash, Ax and Rexona deodorants, and Pepsodent and Signal toothpaste.

  • Home care (20% of turnover): OMO detergent, Comfort fabric softener, Sunlight dishwashing liquid and Cif cleaning products.

  • Food (22% of turnover): Knorr noodles, Hellmann’s dressings and other regional favorites.

  • Ice cream (13% of turnover): Ben & Jerry’s, Talenti, Cornetto and Magnum.

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What makes Unilever unique is that it generates approximately 78% of its revenue outside North America, of which 58% of sales come from emerging markets. These international markets provide the company with higher than expected growth potential for a company operating in the consumer goods sector.

Despite growing underlying sales (net of currency effects) by 7% in 2023, Unilever’s Generally Accepted Accounting Principles (GAAP) sales declined by 1% due to the strengthening US dollar. Ultimately, these headwinds should be temporary fluctuations and merely a byproduct of Unilever’s enormous global scale.

Keeping things streamlined with a global reach like this is of paramount importance to the company, which is why management is shifting its marketing focus to its 30 ‘power brands’. These brands accounted for roughly 75% of the company’s 2023 revenue and grew 9% over the year – outpacing companywide growth by 2 percentage points.

To further this streamlining process, Unilever recently made a surprising announcement: the upcoming spin-off of its ice cream division.

Person looking at the phone while standing in the aisle of a store.

Image source: Getty Images.

No more Ben & Jerry’s?

Unilever recently announced that it plans to spin off or sell its ice cream business, the lowest-margin division of its five business segments. With an operating margin of just 11% – compared to an average of 17% in the other four segments – the company’s ice cream business is a drag on Unilever’s profitability.

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The ice cream unit requires more capital than the other units due to cold storage needs in the supply chain. As a standalone company, it could benefit from focusing on its unique business model and generating new synergies as part of a simpler operation.

As for the new-look Unilever, this separation should create a leaner, meaner company that could receive a friendlier appreciation from the market thanks to the higher profit margins that should result. This proposed split could be the spark needed to reignite Unilever’s share price as the company trades near its lowest valuation since 2015.

Unilever’s once-in-a-decade valuation

Unilever’s dividend yield of 3.9% and price-to-sales ratio (P/S) of 1.8 together highlight that the company may be trading at its most attractive valuation in a decade.

UL PS ratio chartUL PS ratio chart

UL PS ratio chart

Unilever posted a free cash flow margin (FCF) of 12% in 2023 and trades at just under 15 times FCF. For context, the company’s closest peers in consumer staples trade between 24 and 31 times FCF.

Armed with its impressive cash creation, the company only needed to use 62% of its free cash flow generated in 2023 to pay out its impressive 3.9% dividend yield. This excess cash leaves room for future dividend increases alongside continued share buybacks, which has seen Unilever’s share count fall by 2% annually over the past three years.

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These shareholder-friendly cash returns, combined with Unilever’s global scale, lean operations and lower valuations, create an attractive core investment for patient investors willing to buy and hold for years.

Should you invest €1,000 in Unilever now?

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Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool recommends Unilever Plc. The Motley Fool has a disclosure policy.

1 Beautiful Dividend Stock Down 27% to Buy Now, Almost a Once-in-a-Day Appreciation in a Decade Originally published by The Motley Fool

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