Why I'd buy this unloved dividend stock instead of Unilever plc

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Marmite, Unilever

Shares of Unilever (LSE: ULVR) have tripled in value over the last 10 years, as rising sales and profits have combined with strong demand for defensive stocks.

The group's share price has risen by 35% since February, largely thanks to a failed takeover attempt by US giant Kraft Heinz. The strategy review which followed the bid approach resulted in management focusing more heavily on cutting costs, improving profit margins and boosting shareholder returns.

Progress has been rapid. The group's underlying operating margin rose by 1.8% to 17.8% during the first half, while the dividend will rise by 12% this year.

This more aggressive approach has been well received by investors. However, I believe that some of the gains seen over the next year will be one-offs. Analysts' consensus forecasts seem to support this view.

Earnings per share are expected to rise by 30% in 2017, but by just 9% in 2018. I think that much of this forecast growth is already priced into the stock, which now trades on a forecast P/E of 22.

To put this in context, back in 2011, Unilever shares traded on a P/E of 14. The share price gains since then have come from the stock re-rating to a higher valuation, as well as from earnings growth.

In my view, the firm's valuation is starting to reach a level where future returns could be fairly average. Although I certainly wouldn't suggest that anyone should sell their shares in the Anglo-Dutch group, I'm not sure I'd want to buy at current levels.

As a contrarian investor, I'd much rather put fresh cash into a company that's out of favour, but which has the potential to recover.

The market leader

Car accessory and cycle retailer Halfords Group (LSE: HFD) is the largest company in both sectors in the UK. Having such large market share provides certain benefits in terms of branding and purchasing scale.

But the group's pre-tax profits have fallen from a peak of £83.8m in 2015 to just £71.4m last year. The shares have followed suit, falling by 30% over the last two years as investors have questioned future growth.

I'm starting to think this sell-off may have gone too far. In a trading update this morning, Halfords said like-for-like (LFL) sales rose by 2.7% during the 20 weeks from 1 April. Total revenue rose by 4.8%, as the effect of new and updated stores was factored-in.

Sales of cycles were particularly strong, with LFL sales up 5.2% over the period, while retail motoring sales rose by 2.3% on a LFL basis. The only question mark was over the group's Autocentres car repair business, where LFL revenue fell by 2%.

Today's figures appear to be broadly in line with market forecasts for the current year. The shares are up by 3.6% at the time of writing. Looking ahead to the full year, Halfords is expected to report adjusted earnings of 30.1p per share. That puts the stock on a modest forecast P/E of 10.8, with a well-covered dividend yield of 5.8%.

In my view, this could be an attractive entry point. I've added the stock to my watch list for further research.

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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.