When Kraft Heinz announced a takeover bid for Unilever on Friday, I sold quickly and regretted quicker. Selling my winners too early is one of the psychological mistakes I need to work on, and it's a pure lucky gift that UL shares have sold off 7% or so on the London Exchange, giving me a chance to rectify my mistake. Below are the reasons why I initially bought the stock, and am going to buy it again on Tuesday.
-
It's got the brands I know and love. Dove soap, Ben and Jerry's, axe, Vaseline, Lipton, Breyer's, Hellmann's, Klondike, they are literally in almost everything. Their products are some that I would buy back over and over again, and I trust that they will continue to innovate/ make intelligent acquisitions to bolster their lineup of strong brands.
-
Strong, stable and growing dividend and reasonable valuation. In my view UL is a true stalwart with a stable business which allows them to constantly raise prices or at least maintain their solid stream of cash flow. As for valuation, many see a p/e of 26 (or 22, depends on which source you use) and immediately think overvalued, but I do not think this is the case. In my opinion consumer staples is one of the most misunderstood sectors among retail investors - they fully deserve to trade at a market premium despite having less dramatic growth as companies like FB or NFLX. They make up for YOY growth rates with EPS/ FCF per share growth over the longer term (forever, in my opinion, but that's a post for another time)
-
Play on the strong USD becoming weaker. As Unilever does a lot of international business, their revenues in the recent years have been hurt by the strong US dollar. Should the US dollar get weaker, this will prove to be a very strong tailwind for the company.
-
Potential short term catalysts: These kinds of "higher" yielding dividend stocks are always in demand because they provide a stable and growing source of income which is especially valued by retirees. I believe that as a whole this sector has been unfairly punished as investors rotated out of them and into cyclical stocks (because of our dear president Trump). While there are concrete and obvious reasons why to do this transition, this sector makes for a strong potential contrarian sector play. Should the economic outlook become more tumultuous these names should perform well.
-
So which allocation am I classifying it as? When I make investments I always classify the stock so I know what kinds of returns I expect out of them. I classify Unilever as stalwart play - I think it is undervalued 15-20% in the short term, but more importantly I view this as a great chance to buy into a great franchise. With these consumer staples stocks I see a roughly 7-8% total annual return (including dividends). This would be due to 3-4% dividend return, plus 4-5% earnings per share growth.
As always do your own due diligence. Happy investing.
Submitted February 20, 2017 at 03:23PM by linlaoda http://ift.tt/2lEGMms
