What is Unilever all about
This Dutch/British company is based in Rotterdam as of 2018, it’s a large cap company with brands all over the world. Axe, Dove, Knorr, Hellmann’s, Lipton, Ben&Jerry’s, Calve and many, many more. But other than this, what do we really know about this company with a market cap of roughly 140 billion euro.
Introduction to Unilever:
Unilever is a company with a broad scale of consumer products. Their items include Personal Care like skin care, hair care, deodorants and Foods like soup, sauces, snacks and dressings. Home Care products like powders, liquids and capsules but also soap bars and an entire range of cleaning products. Lastly there is Refreshments like ice cream and tea-based beverages.
They also used to have a margarine and spreads division, which was half the origin of the company, but this division got sold to investment group KKR for €6,8 billion in 2018. With this transaction Unilever parts ways with it’s Dutch origin as the modern day Unilever emerged from a merger of the Dutch ‘Margarine Unie’ and the British ‘Lever Brothers’.
Unilever operates in more than 100 countries, sells it’s products in over 190 countries and has approximately 300+ factories in over 70 countries.
What Unilever and it’s management are all about:
Well, Unilever is a mega corporation yet it is also the 3rd company on a list of ‘most sought-after employers’. Only just behind Google, Apple and just ahead of Microsoft and Facebook it’s clear that this consumer goods giant has found a formula to compete with the big technology companies for the top spots of the social status ladder.
Paul Polman, CEO of Unilever believes this is because for a lot of employees, their job turned into a place of purpose. Unilever has 2 million job applicants each year.
My job is not to hit numbers each quarter and to be a hero, that’s to easy. My job is to make sure that this company which has been around for a 150 years, is even stronger than what I inherited and will last for many years more. One of the most important things is to invest in human capital, it’s as they say ‘planting trees under which shadow you can never sit’, but it’s probably the best investment.
Furthermore hersaid that the company and it’s management have thought a lot about what the company should look like from 2020 on. The footprint will change a lot and they will mostly focus on emerging markets, to be able to shift their focus they need great leadership skills and this is why they will keep investing in this so called human capital.
Since Polman became CEO he has focused on making Unilever’s core strategy have a positive effect on the environment and public health, and this is generating enormous opportunities as he said himself.
Their mission is to improve health and well-being across the globe, so it makes a lot of sense that almost 60% of their total sales are from emerging markets, again; a enormous opportunity.
In short we have an ambitious management, which sets out to do good and improve life for a lot of people, which in turn gives plenty of purpose to make their employees commit to their jobs. It’s a company which wants to “serve society, rather than take from it”, this is important for the new generation of employees, and customers.
Dividend history and stock buybacks:
Most recently Unilever decided to up their dividend payout by 8% and they announced a stock buyback of €6 billion which started in May 2018. Just last year after Kraft Heinz made an unwanted bid for Unilever the board decided to reward shareholders a lot more than they were doing at the time. Unilever was focussing on the long term but shareholders voiced their needs and so the management decided to give them a treat. They decided to start a €5 billion stock buyback and to increase the dividend by a whopping 12%. And so after the initial stock price jump because of the bid from Kraft Heinz the stock price remained high as shareholders were quite satisfied with the management.
I think the company acted great, they decided to offer their shareholders some more value but not by acting insane and offering crazy solutions, they kept their long term vision and defused the situation around the takeover bid and unhappy shareholders.
In 2009 Unilever decided to start paying their dividends on a quarterly basis and they have increased the dividend every year since then. It’s quite difficult to say exactly how many years the dividend has been increased prior to this point, even as the Euro itself only got introduced in 2002. What we do know though is that management is focused on returning capital to the shareholders by dividend increases and stock buybacks.
In 2017 Unilever showed us the following numbers about their fiscal year:
- Underlying sales growth exc. spreads +3,5%
- Underlying volume growth exc. spreads +1.0%
- Earnings +11% (€2,24)
- Free cash flow €5,4 billion (+€0,6 billion)
- Underlying operating margin +110 bps
Emerging markets are the big advantage Unilever has over it’s peers, in 2017 their markets developed as follows.
Source: Unilever Fiscal 2017 Report
What catches my eye is the ‘Emerging markets vs Developed markets’ in the second table. In the full year of 2017 the turnover was €31,2 billion vs €22,5 billion in favor of emerging markets. This part should even keep growing at a faster rate and outpace the developed markets growth. This is a big advantage Unilever has over it’s competitors like Procter&Gamble, which have mostly focused on developed markets.
The key focus points Unilever gave us in their presentation are as you can see, changing customer habits like digital shopping, new segments like ‘Health&Beauty’ and the ever increasing stake in emerging markets.
Source: Unilever Fiscal 2017 Report
And finally, the obligations they had at the end of 2017.
Source: Unilever Fiscal 2017 Report
It shows us that their long term debt is nicely spread out and they don’t owe a crazy amount of money, especially compared to their free cash flow of €5,4 billion. It shows me Unilever is not afraid to take advantage of debt to invest in their future. Although paying off a big chunk of this debt in 2018 is something that is comforting nevertheless.
As stated before the price of Unilever’s stock shot up when Kraft Heinz publicly make the $143 billion offer. Yet since that moment the stock has gone slightly back down again, hovering around the €50 mark and then falling down when in 2017 the Q3 numbers dissapointed, mostly because of bad ice cream sales due to bad weather. Since then the stock has seen a low of €42 and now has recovered to €48. Comparing it to the other giants in the consumer goods space the stock has kept it’s value like a champion, partner this performance with the great announcements of big stock buybacks and increased dividends which were higher than for example Procter&Gamble’s raise of 4%, and we’ve got ourselves a winner in my view.
Kraft Heinz take over attempt:
Back in February 2017 Kraft Heinz made a surprise offer of $143 billion to acquire Unilever. This was backed by their management of 3G Capital and even Warren Buffett, it shot the stock price of Unilever up all the way from €38 to over €50. Unilever’s management had no interest and told the board of Kraft Heinz a simple ‘no’. Yet shareholders we’re not so thrilled, they seeked more action and excitement from Unilever’s stock. So to please their own shareholders, Unilever’s board decided as stated above to increase the dividend, execute a big stock buyback and to divest divisions with low growth and margins.
Now in 2018 investment firm KKR has bought the spreads division from Unilever and the board can now focus on more sustainable and higher growth areas of their business. The spreads division brought in an annual €3 billion out of a total of €52 billion in 2016, and that year the EBITDA margin of the spreads division outpaced the rest of the products, 22% vs 18%. Yet organic revenue will grow significantly faster, the first nine months of 2017 Unilever booked organic top-line improvement of 2,8%. When you remove the spreads division out of the equation it turns into 3,2% during the same period.
While consumer products or FMCG (Fast Moving Consumer Goods) are generally slow-growth these days, over 3% of organic growth is an amazing number.
Additionally, in the press release about this transaction, management stated that it intends to return the cash of the sale to the shareholders, “unless more value-creating acquisition alternatives arise.”
Some notable acquisitions:
Unilever is focusing on acquiring a lot of geographically dispersed companies to diversify into new markets and new segments. Recently they have bought a lot of companies to strenghten their portfolio. A few notable names are:
- Schmidt’s Naturals
- Tazo Tea
- Carver Korea
- Pukka Herbs
- Dollar Shave Club
It shows us they are looking for geographically diverse acquisitions in multiple ‘hot’ sectors as natural herbs and teas, low cost shaving and beauty products.
At a current share price of around €48 Unilever doesn’t seem cheap, their P/E is 24,81 and this might be high, the stock seems highly priced compared to the other consumer goods stocks. Maybe at the current price it’s not the ideal buy candidate, however I strongly believe Unilever has the best position to take advantage of upcoming markets and new products. You pay a premium, which is there for a reason compared to other consumer goods stocks, the future is bright for Unilever.
For value investors however, you might want to wait a bit until the P/E ratio sees a more sector-conform level. Dividend growth investors however, Unilever is a great company, world wide with a wide variety of products and a new born focus on returning capital to their stakeholders thanks to the failed Kraft Heinz takeover. Be sure to take a good look at this company.