Mr. Market is upset with Unilever's (UL, Financial) $68 billion dollar attempt to buy GlaxoSmithKline's (GSK, Financial) consumer health care business. This has combined with the general market doldrums and the chatter about high valuation to drive down the price of Unilever's stock to below $50 per share.
I think it is an excellent value opportunity given the company's many strengths. Unilever is a leading consumer staple company. Even if the market were to go down into a bear market (defined at a 20% or greater decline from its recent high), a solid consumer staple pick should do better than the rest of the market as it is a defensive sector.
The attempt to take over GlaxoSmithKline's consumer health care business is also not a bad move. The consumer health care sector is an attractive sector, and the quality of GlaxoSmithKline's brands is top notch. Even though Unilever's management has confirmed that they will not raise the price beyond what they last offered, it is possible that a deal may be done with a slight premium. I don't think the price is excessive considering the quality of the assets.
Unilever is also very strong in developing markets like India, Indonesia and China, and these markets have very attractive valuations as compared to North America and especially the United States. With Unilever, you get not only exposure to high GDP growth markets but also management team with high integrity and competence with a long history of operating in these markets. Many of the developing world's domestic economies are still recovering and should improve sharply in the next three to five years.
The dividend is very good at a yield of 4.12%, and the company has an excellent record of raising the dividend.
The balance sheet looks pretty healthy. Though Unilever has over $30 billion in long term assets, given the company's prodigious cash flow, this is not a problem.
The company's interest coverage ratio is about 16.67 times operating income, and operating cash flow is over 11 billion.
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It's even rumored that Trian Fund Management, the activist hedge fund run by Nelson Peltz (Trades, Portfolio), has acquired a stake in Unilever. According to a report from The Financial Times, "sources familiar with the matter" leaked the news, though Trian and Unilever declined the news outlet's requests for further information. Peltz previously ran a major activist campaign against Procter & Gample (PG, Financial) to obtain seats on the board of directors, which led to the ouster of its then CEO and a huge increase in stock price since 2017.
All in all, Unilever's current price looks like a great entry point for those interested in this blue-chip income stock. This stock is a SWAN - "Sleep Well At Night."
