Up Close: Unilever
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Unilever is a major food and processed and packaged goods maker best known for its Axe, Dove, Hellmann's, and Lipton brands. Here I will take a closer look at the three factors I find most helpful for long term investing: corporate governance, long-term business plan, and valuation.
Corporate Governance
Usually when examining corporate governance, I'm looking for two things: a shareholder-friendly board and a history of making shareholder-friendly decisions (namely, paying out cash to shareholders). Unilever meets both of these criteria, having eight independent board members compared with four executive members (including a non-executive chairman) and yielding 3.85% today with a 9% long term compound annual growth rate of the payout.
However, Unilever's corporate structure is far more interesting than most companies. When the company was first formed, the two merging entities remained two separate legal entities: Unilever PLC (NYSE: UL) (based in UK) and Unilever NV (NYSE: UN) (based in Netherlands). Although the parent companies are legally separate entities, they operate as a single entity, share a board, and maintain the equivalence of shares through an equalization agreement. Hence, UL and UN shares are more or less interchangeable save the possible taxes placed on the dividends by the country of origin (consult a tax professional to confirm which shares are tax advantaged). Overall, this structure does not bother me too much; however, I believe it is unnecessary and over-complicated.
Business Outlook
The long-term success of Unilever largely rests on the increased wealth in emerging markets. Unilever has more than 50 years of experience in the major markets of China, Brazil, India, and Indonesia, giving them an advantage over late comers. Thus, it is not surprising that 53% of Unilever sales come from emerging markets, a much higher percentage than their competitors. Yet, there is much more growth ahead in these markets, and Unilever should benefit from both out sized population growth (13 of the 15 most populous countries in 2020 are expected to be emerging countries) and increased wealth in these markets (most emerging-market consumers spend only 1 or 2 dollars on bath and shower supplies where Americans spend 17). Unilever's experience and innovated selling strategies (Project Shakti and the "Perfect Store" Program) in the emerging markets should give them a leg up on their competitors.
Unilever's business as of late has suffered from poor margins. Gross margins for Unilever are around 40%, lower than most of the packaged goods companies they compete with but higher than comparable food companies. Gross margins could improve in the short term if commodity prices fall. Where Unilever really suffers is in operating margin, lagging Procter & Gamble by 200 basis points. However, Unilever is well aware of their short-comings in this area and has been working to stream line the business through its One Unilever program. I believe the company will get it right and investors will be rewarded with expanding long-term operating margins.
Value
Unilever trades just over 17 times earnings (1-2 points lower than similar companies) and around 13.5 times forward earnings (a lower multiple than all of its peers). However, Unilever earnings are expected to grow more slowly than the groups, so a lower earnings multiple may be justified. Although Unilever is not a screaming buy compared to its peers, the company has focused on growing free cash flow (up around 30% since 2008) and yields more than its competitors.
Overall, I believe Unilever is a safe, defensive company poised to grow its free cash flow and earnings at a reasonable rate. The stock, while not trading in "must-buy" territory, offers a decent value proposition and should reward the long-term holder.
dtlly has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
