BUY: Unilever (ULVR) and SELL: Amlin (AML)--Swapping the Consumed for a Consumer

NB: This purchase was actually made on 10 September. 

Earlier this month it was announced that the FTSE250 reinsurer, Amlin, was to be bought for an all-cash 670p per share offer by Mitsui Sumitomo. At that time I noted that I had two options:

1. Hold: Continue to hold the company until the sale (presumably) goes through and then bank the 670p per share.
2. Sell: Sell before the deal is completed (at a slightly lower price) and use the proceeds to work for me as soon as possible.

In the end I decided to go for option two. Why? Well, although I don't doubt that the deal will go through, it is nice to bank the profit now. 

Also, the price difference today and the final bid price was limited and seeing as the markets are rather depressed at the moment it seems an opportune time to deploy the cash elsewhere.

Amlin Heads Out

Shares: 134
Price: 654.65
Dividend Income from Trailing Twelve Months (TTM): £36.58

As noted before, Amlin replaced Catlin in my portfolio when it was announced that the latter was being purchased by XL Group. The speciality insurance sector is one of my favourites. However, sadly, it has dwindled in size of late.

Nonetheless, Amlin has been a good buy for me. In the last twelve months--including the to-be-paid interim dividend and excluding the special dividend--the dividend has amounted to 27.3p per share. A pretty generous yield.

Now, the sale netted me £872.23 (minus fees). That is quite a hefty return on my original £688.50 investment. Indeed, from a plain capital gains perspective it represents a 20% return. With dividends included it nearly amounts to a 29% return.

When you bear in mind I had only held it since March as well, the annualised rate of return is a staggering 50% from capital and 65% from capital and dividends! Not bad at all.

Of course, that could have been more. The acquisition priced the company at 670p per share. This would have thrown out £897.80 if I had waited for the acquisition to go through. That is £25.57 more than I received from this sale.

However, of course, I could put the cash to work elsewhere in the meantime....which I did. But where? Well, over at the consumer giant Unilever.

Unilever Comes In

Shares: 33
Price: 2565.67
Predicted annual dividend income: €39.27 (c.£29) (this purchase) €86.87 (c.£64) (entire holding)

I have--like so many people--always found Unilever an attractive long-term investment. It owns such an impressive array of high-quality brands across a number of attractive consumer sectors there are few people who can claim not to have some relationship with the giant.

Indeed, its size and diversification (of products and geographies) leaves it with few comparable peers. US giant (and hopefully future core holding for me) Procter & Gamble being its closest rival.

However, I have not topped up my holding since I last did back in January 2014. As a result, it has shrunk to a fairly small holding outside of my Top 10 largest. This was for no particular reason other than the fact that it seemed to me to be a little expensive relative to other investments at the time.

However, with the recent market volatility Unilever came back down to around about the same price I paid back in early 2014. Time, it seemed, was ripe to bulk up my holding a bit.

So how does the purchase look?

Reasonable Value

Being such a major player in a higher attractive and stable industry we rarely see bargain basement prices for Unilever. As such, you usually have to raise you threshold for such companies. Since 2011 they have seen annualised EPS growth of 4.5% which is pretty solid.

So what do the analysts predict for this year coming?

		EPS	P/E Ratio
Consensus	€	1.83	19.25
High	€	2.02	17.44
Low	€	1.67	21.10
Difference (%)		19.96

Clearly this is hardly bargain basement in absolute terms. But for me, a PE of 19 is fairly reasonable for a company of Unilever's calibre and health.

This is particularly true when you bear in mind the weakness in the Euro at present. If the Euro was to return to its 10 year average exchange rate tomorrow the consensus PE would sit in the 18s which is not bad at all.

Certainly the lowest prediction leaving a PE of 21 is rather high. However, that prediction seems overly pessimistic in light of the continued outperformance of Unilever compared to analyst predictions in recent quarters.

And then for next year:

		EPS	P/E Ratio
Consensus	€	1.97	17.89
High	€	2.19	16.09
Low	€	1.81	19.47
Difference (%)		20.01

Here we see Unilever hitting back with some more serious EPS growth. With the consensus PE looking to head below 18 I would be a very happy bunny.

Dividend

Obviously, the yield for Unilever is not going to fully replace Amlin's yield. However, their yield is anticipated to grow by about 6% for this year and next.

As a result, it has a solid predicted yield of €1.19 and €1.27 during that time which throws out a yield of 3.38% and 3.6% (at current EUR to GBP rates).

However, here it is useful to consider again the EUR to GBP exchange rate average. Using that for a 10 year period the predicted yields would be about 3.6% and 3.85%. With this I would expect to see about £31 and £33 dropping into my account as dividends instead of £29. Something to bear in mind there.

The yield is pretty well covered as well. For this year and next it is anticipated to covered by at least 1.4 times earning with the consensus at 1.55 times earnings. For a company with such a consistent earnings profile as Unilever this is more than ample.

Other Numbers

With regards it other numbers Unilever also looks in rude health. It's debt load has been increasing of late. However, it remains at a fairly comfortable debt to equity ratio of 0.91. 

Ideally I'd like to see that come down to the level of other consumer giants like Reckitt Benckiser, PZ Cussons and Procter & Gamble to around 0.4 to 0.5. However, for a company like Unilever with stable earnings and with a credit rating that is A grade and seen as stable it is perfectly fine.

Unilever also has a pretty sizeable amount of cash on their books (about 46p per share). It is not as high as some others. However, for a consumer company like Unilever this seems to be fairly average for the sector.

Unilever and My Investment Goals

Unilever looks a pretty nice addition to my portfolio in replacement for Amlin. I will only receive a little less in dividend income than I did with Amlin. However, it also fits pretty nicely into my investment goals for this year.

With a Beta of around 0.54 it should help keep the volatility of my portfolio a little lower. Certainly, it will help to achieve my target of a portfolio Beta of 0.85 or less for 2015.

The yield--although not super high--is more than ample and should grow nicely in the coming years (especially if currency exchange headwinds turn to tailwinds). 

What is more, I will receive one more quarterly dividend payment from Unilever this year which this purchase will benefit from. As such, I have almost doubled the value of that payment to about £16 from the £8.50 predicted previously. This will help me hopefully tip over the line of my £1,100 dividend income goal for this year

The additional dividend will also offset some of the "lost" income I would have received if I had just allowed the Amlin acquisition to go through. Indeed, I should see about £16 additional dividends from this fresh purchase drop into my account before the purchase is completed (around March next year) which leaves me only £10 out of pocket.

Overall, I am very happy with my purchase. Now Unilever is my second largest holding joining at what I think is a reasonable price. Consumer Goods also now represents my biggest sector holding. It has now just overtaken the financial sector for, I think, the first time since early 2014.

Ideally, I would like to look to bulk up some of the other sectors here which are under-represented at the moment. Health care and industrials stand out in particular. However, I would be quite happy to bulk up my utilities exposure as well if the opportunity presents itself. We will see.

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[Creative Commons image reproduced from Flickr user Ingmar Zahorsky (ingmar)]