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Motley Fool Issues Rare “All In” Buy Alert

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U.K.-based Unilever (UL -0.48% ) is one of the world's largest consumer staples producers with a $120 billion or so market capitalization. While it owns iconic brands, being big isn't enough in the highly competitive spaces where it operates.

And if the weak stock price over the past five years (down over 20%) is any indication, investors are not very excited by Unilever's prospects. Yet, here's why there is reason to be excited -- if you can handle sitting tight through what could be a bumpy turnaround.

The main reason for investors to like Unilever today is the company's fat 4.1% dividend yield. That's toward the high end of the consumer staples company's historical range, suggesting the stock is relatively cheap today. The unfortunate piece of this equation is that dividend yields move in the opposite direction of stock prices, so the yield is only as high as it is because the stock has not been performing very well.

To be fair, no company's business grows to the sky, to paraphrase an old Wall Street saying. Businesses tend to move along a sine curve, with good periods followed by bad, which are eventually followed by good times again. Unilever traces its history back to the early 1900s, so it has seen some ups and downs over its more than 100 years. 

Moreover, it owns some of the world's most iconic brands, including Dove personal-care products and Ben & Jerry's ice cream, among many others. The problem here is that growth has been sluggish and the company has been in the headlines for the wrong reasons.

The negative that's most in the news today is an internal squabble between Ben & Jerry's and Unilever over the ice cream maker's social mission, which is overseen by an independent board. It's kind of ugly, but so far hasn't had too much of a material impact on Unilever. It is a drama worth watching, but as an investor, it's probably not one to be too worried about much. In other words, it's a distraction.

The other headline this year is likely to be far more important. In early 2022, activist investor Nelson Peltz drew attention as he started to build a position in the company. In a previous foray, Peltz helped turn around Procter & Gamble (PG 0.61% ) after a rather nasty battle for a seat on that company's board.

Unilever wisely chose not to put up a fight and added Peltz to its board. This move, however, took place after a high-profile effort to acquire a healthcare division from GlaxoSmithKline was roundly pilloried by investors and eventually dropped. Basically, it would have been hard for management to reject a helping hand from Peltz after that experience.

The job here is likely to be difficult because of Unilever's broad product line -- which includes staples (soap, for example) and food (ice cream) -- and its geographic reach, which includes about 60% of revenue coming from emerging markets. And yet there's still material opportunity, given the company's strong collection of brands.

Management is already working to streamline its business, cutting layers out of the approval process. It is also tying pay more closely to results. Compensation was something on Peltz's wish list, but it isn't an instant solution. Moreover, this turnaround is taking shape while inflation is elevated, potentially making it even harder for changes to gain quick traction. 

The big question from here is whether or not Unilever can get back on a sustained growth track. There's no way to know for certain, but there are early signs of success.

For example, it pushed through 9.8% in price increases in the second quarter while only seeing a modest drop in consumer demand. Overall, organic growth came in 8.1% higher year over year, which was fairly solid and on par with some of its strongest peers.

The new corporate structure, meanwhile, was only just put into place in late July, so there's no read yet on what's happening on that front. But it would be shocking if the results were worse than in recent years. 

At this point, dividend investors should probably ignore the Ben & Jerry's mess and focus on business fundamentals. Although Peltz has been replaced by Ben & Jerry's in the headlines here, his influence is clearly being felt as the company revamps operations and compensation. There's no quick fix, but management appears willing to change, and that is the first step in fixing what ails Unilever.

With strong brands and a broad reach, including into higher-growth emerging markets, this stock is probably worth owning for dividend investors willing to ride out a turnaround. The historically high yield, meanwhile, should be ample compensation. Just listen closely over the next few quarters to see how well the management changes are playing out.

Reuben Gregg Brewer has positions in Procter & Gamble and Unilever. The Motley Fool recommends Unilever. The Motley Fool has a disclosure policy.

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