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I’m keen to buy this top FTSE 100 income and growth stock in March

Senior couple crossing the road on a city street. They are walking with shopping bags while Christmas shopping.
Image source: Getty Images

Consumer goods giant Unilever (LSE: ULVR) has had a rough time lately, which took me by surprise. For years, I considered it the most solid stock on the FTSE 100, with the possible exception of spirits giant Diageo. Yet lately it has come under fire on a number of fronts.

Post-Covid supply chain disruptions and global economic slowdown saw earnings per share fall for three years in a row, and at an average rate of 12% a year. The group’s ill-fated £50bn takeover bid for GlaxoSmithKline’s consumer healthcare arm also cast a shadow.

FTSE 100 winner turned loser

Unilever’s management then managed to stumble into a culture wars row. Critics claimed CEO Alan Jope was too busy worrying about unconscious bias training and failing to show enough concern about the embattled bottom line.

The company also drew the attention of activist investor Nelson Peltz, who reportedly wanted to break up the company. One option was said to be spinning out Unilever’s food and refreshments business. Things have gone quieter now Peltz is on the board.

Unilever’s shares peaked at 5,333 in September 2019, then went into sharp decline. At this time last year, they traded at just 3,400, a drop of 36%. That was a shock fall from grace after years of steady, seemingly unstoppable growth.

No stock climbs in a straight line forever. For that reason, I prefer to buy companies when their share price is down rather than up. You never know what is coming either way, but it reduces the risk of overpaying.

I should have bought Unilever a year ago. Its share price is up more than 20% since those dark days. Yet there are still good reasons to buy it this March.

First, it is still relatively cheap, by its own standards. I grew accustomed to Unilever shares trading at around 24 times earnings, but today its price-to-earnings valuation is just 18.5. That’s good value for what remains a quality global company.

Good value by its own high standards

Its dividend yield is slightly better than it used to be, although hardly spectacular at 3.7% a year. However, that is covered 1.7 times by earnings, and is forecast to hit 4.2% next year. Unilever management has treated dividend investors well in the past, so I would anticipate further progression.

Unilever is thought of as a defensive stock, as its revenues should hold up during a downturn. Consumers continue to buy low-cost essentials such as soap, shampoo, toiletries, and washing-up powder in a recession.

Accordingly, this month’s figures showing annual sales growth beating expectations at 9%. Better still, Unilever has pricing power, which allows it to pass on increased to costs to customers. Over the year, its prices rose by 11.3% with little impact on sales.

That should prove important going forward, as inflation could prove stickier than we think. Management expects “strong underlying sales growth” in the year ahead. That’s good enough for me.

I may have missed my chance to snap up Unilever at a true bargain price, but I still think it looks good value for a long-term, buy-and-hold investor like me. It’s on my buy list.

The post I’m keen to buy this top FTSE 100 income and growth stock in March appeared first on The Motley Fool UK.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo Plc and Unilever Plc. 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 2023