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Cheap shares: I’d buy stock in this great British business today!

Cliff D'Arcy
·3-min read
Mother, father and child girl in new house with a cardbox roof. Symbol of protection and property.
Mother, father and child girl in new house with a cardbox roof. Symbol of protection and property.

It’s been a great November so far for UK shareholders, with the FTSE 100 index surging since Halloween. As I write, the Footsie stands at 6,393 points, up an impressive 815 points (14.6%) so far this month. Across the Atlantic, the US S&P 500 rose to a record closing high of 3,627 points on Monday, up 12.3% in 2020. Yet these rising indexes haven’t lifted all stocks equally. Indeed, some stocks have fallen back from recent highs, pushing them deeper into value territory. Here’s one example of a recently slipping share price in a fundamentally great business. But do these qualify as cheap shares today?

Unilever is an Anglo-Dutch success story

Billionaire investment guru Warren Buffett has this to say on buying cheap shares: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. In other words, you get what you pay for, so it’s often worth stumping up a premium price for quality. I’d say that Unilever (LSE: ULVR) certainly qualifies as a wonderful company. In fact, Buffett and his financial partners actually made a failed bid to buy Unilever in 2017. This was swiftly rejected by Unilever’s board of directors. For me, this Anglo-Dutch purveyor of consumer goods is one of the best companies in Europe. But are these cheap shares?

Here’s one statistic about this great business to really blow your mind. Over 2.5bn people worldwide — roughly a third of the global population — use Unilever products each day. What’s more, the group has a long-established reputation and pedigree, dating back to 1871. Today, Unilever sells over 400 different household goods, including top brands in hygiene, cleansing, food, snacks and drinks. Yet Unilever’s stock has been slipping back recently, possibly pushing it into the ‘cheap shares’ category.

Cheap shares or a quality buy?

At their 2019–20 peak, Unilever shares hit an all-time high of 5,324p on 3 September 2019. During the Covid-19 crisis, they slumped, diving to a 2020 low of 3,726p on 16 March. During this market meltdown, Unilever was definitely dumped in the ‘cheap shares’ bin. As I write, Unilever’s shares trade at 4,559p, 765p (14.4%) below their 2019 high. They are certainly highly rated, trading on a price-to-earnings ratio above 20 and an earnings yield below 5%. Buy they do offer a forward dividend yield of 3.6% a year, higher than the FTSE 100’s current 3.2% yield.

Historically, Unilever’s success in growing its business has produced excellent returns for its shareholder owners. What’s more, the firm is highly diversified across FMCG (fast-moving consumer goods) categories, with its products sold in over 190 countries. In short, Unilever has enormous size and scale, plus heavy exposure to fast-growing emerging economies. What’s not to like? However, the share price of this highly profitable, growing and well-run firm has fallen back this month. Hence, although I wouldn’t classify these as cheap shares per se, I think 4,559p is a fair price to buy into a wonderful company. At today’s price, I think Unilever shares are a firm buy. Ideally, I’d buy them inside an ISA, to enjoy decades of tax-free dividends and future capital gains!

The post Cheap shares: I’d buy stock in this great British business today! appeared first on The Motley Fool UK.

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Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2020