Billionaire Warren Buffett is often quoted on his remark that “our favourite holding period is forever”. But what’s often missed is the first part of his comment, where he said that forever investments should be “outstanding businesses with outstanding managements”.
I think that my first stock today qualifies on both scores. consumer goods group Unilever (LSE: LON:) is an impressive business by any standard. That’s not just my view — Warren Buffett tried and failed to buy this business in 2017.
Buffett’s failed bid attempt acted as a wake-up call for Unilever’s management. The firm has since adopted a more aggressive approach to growth, costs and shareholder returns. Although I have mixed feelings about some of these changes, the results so far have been impressive.
In 2018, the group’s underlying operating profit margin rose from 17.5% to 18.4%. Share buybacks helped to boost earnings and dividend growth was accelerated. In all, more than €10bn was returned to shareholders.
There’s more to come
The pricing power of Unilever’s brands is a key part of the company’s appeal to investors. Last year, the company only managed a 1% price increase compared to the prior year. That was a step back from 2017, when the firm bumped up prices by an average of 2.4%.
Luckily, the company seems to be returning to form under new chief executive Alan Jope. On Thursday Mr Jope said that prices rose by an average of 1.9% during the first quarter of the year, with volumes up 1.2%.
This growth was led by a strong performance in emerging markets, suggesting this important part of the firm’s expansion is still on track.
The right time to buy?
Another of Warren Buffett’s most famous quotes is that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.
I’m confident Unilever is a wonderful company. But with the shares trading over 4,500p and close to record highs, is the price still fair? Probably.
Although the shares trade on 20 times 2019 forecast earnings and offer a dividend yield of just 3.3%, I think Unilever’s high profit margins and steady growth suggest that the shares could be worth a lot more in 10 years’ time. I’d rate the stock as a long-term buy.
A defensive bargain?
If you’re like me, you might prefer to buy quality businesses like Unilever when they’re out of fashion and going cheap.
One possible choice for bargain hunters is funeral provider Dignity (LSE: DTY). This national chain expanded aggressively for many years. Profit margins peaked at over 30%.
However, the Dignity share price has fallen by 75% since October 2016, as the company has been forced to slash its prices.
Tougher competition and price comparison are to blame. It now seems that Dignity’s impressive profits relied on hefty regular price rises to offset slowing growth.
Pre-tax profit fell by 43% to £40.5m last year and the group’s operating margin dropped from 30% to 21%. However, this is still an impressive figure and analysts expect profits to stabilise at this level.
If these forecasts are right, then I think the current share price could seem cheap in a few years. And while high debt levels remain a risk, the stock’s forecast P/E of 10 and 3.4% yield suggest plenty of bad news is in the price. I’d rate the shares as a speculative buy.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and 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 2019