Thesis: Unilever (UL)

I purchased shares of Unilever back on August 2nd at a price of $46.95.

Three primary reasons for the purchase:

  • First, I had a desire to put more money into consumer staples.  I’ll explain in a future post, but I’ve come to believe that–for large cap stocks–they tend to be less volatile than some of the other sectors.  My portfolio is over-allocated towards technology, and I believe I’d experience better returns by buying great companies in other sectors.
  • Second, I thought the price was not unreasonable.  The earnings multiple and yield were comparable to Procter and Gamble.  While they were both expensive by historical standards, I think we’re in an expensive market, and I felt good paying the price I did–especially compared to where my capital had been deployed.
  • Third, I think the acquisition of Dollar Shave Club was brilliant.  I am a frequent customer of razor blades, and if I never buy another razor in a store, I will be thrilled.  This is a great example of a product that should definitely be sold online:  you rarely need it immediately, it’s valuable per unit volume, and there is no need to physically hold or experience it to make the purchase decision.  And the customer proof is there: Dollar Shave Club has 15% volume share of a category where the leader, at 70% share, was purchased last decade for $57B.  As Ben Thompson points out, this makes Unilever’s purchase a fantastic deal–even disregarding the value of the e-commerce team and customer data.

 


Update #1

One month later, the investment is up 3.6% to $48.63 vs. 0.65% for the SP500 index.


Update #2

Five months in, the position is down substantially.  UL now trades at $41.19, down 12% in a time frame when the SP500 is up by 5%.

Two learning points.

1) The growth hypothesis I had on this was positive, but a relatively small part of the overall value of the company.  Even if the Dollar Shave Club acquisition is tremendously successful, it’s a small portion of UL’s business.

2) It’s easy to forget, but part of this investment for me was diversification.  I wanted to have more capital in consumer staples because I want downside protection, because these business are more resilient during recessions.  When the market rallies and the investment underperforms, I should be satisfied, not frustrated.  A good lesson for the mindset of investing.

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