One fast-growing dividend stock I'd buy over Unilever plc

Marmite, Unilever
Marmite, Unilever

FTSE 100 consumer goods giant Unilever (LSE: ULVR) has a reputation for reliable earnings and dividend growth. But since fighting off a takeover bid from US group Kraft Heinz in February, this defensive stock has started to look quite expensive to me.

I think there may be better choices for long-term growth.

Is the tide turning?

Unilever shares have slipped back by around 7% from October's 52-week high of £45.57. But at about £42, they are still valued on a 2018 forecast P/E of 20. The expected dividend yield for 2017 is now just 3%, below the FTSE 100 average of 3.9%.

One point that's often overlooked is that the group's growth rate in recent years hasn't actually been that high. Sales have increased by an average of just 2.6% each year since 2011. After-tax profit has risen by an average of 4.7% per year.

Although the firm's shares have risen by 84% since 2012, this is partly because they've become more expensive. In November 2012, the stock traded on about 19 times trailing earnings. Today, that figure is about 23.

If the shares were on the same trailing P/E today as five years ago, I estimate that the share price would be about £34.30. That's around 19% below today's price.

I may be wrong

This year's takeover attempt has led the firm to take a more aggressive approach to profit growth. July's interim results showed early gains from this strategy, as the group's underlying operating margin rose by 1.8%. Underlying earnings per share were up by 12%, excluding currency gains.

Unilever may continue to power ahead. But my view is that the challenge of relatively slow sales growth won't be easy to meet. I might continue to hold, but I wouldn't buy the shares at the current price.

A long-term multibagger?

Several of the UK's challenger banks have been acquired over the last couple of years. One exception to this trend is Virgin Money Holdings (LSE: VM).

This FTSE 250 bank unveiled ambitious plans for growth this morning. The group hopes to make inroads into the SME market. It's also targeting a big increase in personal customers, when its new digital banking platform launches in 2018/19.

Unfortunately, these potentially exciting plans were overshadowed by warnings that market share and profit margins are expected to be at the lower end of previous guidance in 2018.

Competitive pressures in the mortgage market mean that the bank's market share is expected to be at the "lower end" of 3%-3.5%. Meanwhile, credit card balances are expected to grow by a "mid-single-digits" percentage. That's a lot less than the 18% growth seen during the first nine months of 2017.

Cheap enough to buy?

I'm pleased that the bank seems to be focusing on asset quality ahead of growth. I think that the group's current modest valuation could be a good starting point for long-term gains.

The shares currently trade on a forecast P/E of 7.5, and at an 8% discount to a tangible net asset value of 284p. A dividend yield of 2.2% is expected this year.

Looking ahead, the firm's move into the SME market and its planned low-cost digital bank should boost long-term profits. I believe this could be a stock to tuck away for a few years.

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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.