Unilever has produced amazing results for shareholders over many decades and especially in the last ten years.
Its shares have more than tripled since their 2009 lows and, with progressive dividends included, shareholders have seen returns of around 15% per year over ten years.
That would be impressive for any company, but it’s even more impressive given Unilever’s defensive nature, thanks to its large portfolio of defensive consumer products such as Domestos bleach, Matey bubble bath and Ben & Jerry’s ice cream.
However, it’s a fact that trees do not grow to the sky and companies cannot grow faster than average forever.
So does this mean the good times are finally over for Unilever investors, or is the company still a no-brainer if you’re looking for income and growth?
I thought this was an interesting question, so I reviewed Unilever in the latest issue of Master Investor magazine:
Unilever: Still a no-brainer?
John, You woud consider it at £35?
That’s a big leap from the £23 suggested 16 months ago :-
“””””””However, at a lower price it would move up the screen and at some point it would enter the top 50, which is where I select new investments from.
So if everything stayed the same, i.e. revenues, earnings and dividends unchanged, but the share price fell far enough (and the yield rose high enough), then I would buy.
And here is that price:
TARGET PRICE: I would be willing to buy Unilever at anything below £23
At £23 Unilever would have a dividend yield of 4.7%, which I think is far more appropriate given its pedestrian 3.5% overall growth rate.
The PE ratio would be 14 and more importantly, the PE10 and PD10 ratios would be 18 and 28 respectively, which are both pretty close to the market average.”””””
How has the business moved up on your stock screen from position 165 which it was back in Oct 2017 to 59 today?
Is it that the criteria behind your stock screen tool has changed radically to incorporate more metrics and remove some others perhaps?
From a personal perspective, I’m a bit on the fence, which is a terrible position to be in from and investors perspective.
I did hold this as a large position and sold out at 42XX after several years – the price was starting to feel stretched.
I also see Nick Trains arguments about the often undervaluation of brands and his example of Dr Pepper (formerly part of Cadbury) ultimately being sold for something like 10 times the whole value of Cadbury when it was stolen by Kraft from Bourneville.
It’s a conundrum isn’t it? — just what is the value of some of this stuff?
Next you see the £40 starting bid for Unilever from Kraft-Heinz which had it been more warmly received would have probaby taken the price somewhere between £45 and £50 – but Warren Buffet doesn’t do hostile so he backed off.
Last but not least is now witnessing the value destruction after the big write downs of Kraft Heinz in the last weeks — I couldn’t resisit buying some at $32 but that’s more of a punt on my part – is it wise? – I’ll let you know in due course.
Back to Unilever — I’ve subsequently bought back at 38XX and sold at 42XX twice but for more modest tranches as like you I don’t see the upside in the short or medium term here.
One thing that also perhaps is worth noting, is that should the UK and the EU ever stop bickering and get on and work together, unlikely as the EU is a broken political and not an economic regime (but that’s a whole other argument so I should stop there), then maybe – just maybe £ will rise and dramatically.
That will mean all these multinational UK listed companies share prices will TANK!
LR – sorry to take up so much print space
Hi LR, I’ll quote the bits of your comment I’m replying to so we can keep track of it all:
“That’s a big leap from the £23 suggested 16 months ago”
Excellent point. I did notice this and was going to mention it, but I didn’t want to go into a 500 word explanation which probably wouldn’t interest most readers anyway.
However, it’s a very valid point. My target price has indeed jumped up by 52%, so that’s quite a change.
A big part of that increase is down to Unilever’s growth. In my 2017 review the latest annual for Unilever were for 2016 and this latest review is based off its 2018 results. During those two years, Unilever grew its per share revenues by 6%, earnings by 30% and capital employed and dividends both by 21%.
So around 20% of that target price increase is due to Unilever’s growth over the past couple of years.
“Is it that the criteria behind your stock screen tool has changed radically”
Yes and no. Yes, the stock screen changed, but no, the changes were not radical.
For example, when measuring growth rate I switched from measuring eps growth to measuring capital employed growth (I also measure revenue and dividend per share growth).
These changes, plus improvements in the company’s growth over the last couple of years, have taken its 10yr growth rate from 3.5% in my 2017 review to 5.9% today.
This improvement in long-term growth rate increases the target price of the company, all else being equal. But I can’t say by how much as I don’t use a strict ratio like PEG (P/E to growth rate ratio).
Another change which might have increased Unilever’s target price is that I now include return on sales (net profit margin) in each company’s profitability score. Previously this was based on return on capital employed alone. Unilever has good returns on capital (17%) and good returns on sales (10%), so as I say this might have helped too, but I haven’t crunched the numbers to know for sure.
Also, remember that my stock screen is relative, not absolute, so Unilever’s position on the screen and target price will depend on the results that other companies are producing and how much they’re selling for in the market. If other companies have (on average) worse growth than two years ago and/or they’re available at less attractive prices, then Unilever will go up the stock screen purely because other companies become less attractive.
So while I agree that it looks like a big change, when you pick it apart I don’t think the change is that big, and at £35 Unilever would still have a 4% yield which is not bad going for such a defensive stock.
Finally (at last!), £35 is my absolute top price, and in reality I probably wouldn’t buy at that price. If Unilever was at £35 and position 50 on my stock screen then there would probably be at least ten other companies out of those 50 that I would be happier to invest in (and didn’t own already, of course). A price below £30 would more realistically get my attention.
“It’s a conundrum isn’t it? — just what is the value of some of this stuff?”
I always like to do a back-of-a-fag-packet yield-plus-growth calculation to see if it makes sense.
Unilever’s 10yr growth rate is about 6% (the dividend’s gone up by about 8% per year but that isn’t sustainable with 3%/yr revenue growth) and its dividend yield at £35 would be about 4%, so that’s 10% yield plus growth, which isn’t bad.
At the £50 you mention it becomes more about what an acquirer could get by breaking it up rather than what the company can produce today. And without being broken up Unilever is unlikely to be worth £50 per share as far as I’m concerned.
John,
Good recovery effort there, although I’m not convinced that Unilever would jump from position 165 to 59 in such a short 14 months but heh ho it doesn’t matter, we are were we are so to speak — I’d kind of thought that 23XX was quite pessimistic at the time and that 35-38XX is more in line with were it is a reasonable buy and perhaps a 10% lower value if £ recovers a good % of it’s value.
I think a clean break from the EU would see the Euro fall and £ rise – not initially but the opportunity to lower tariffs and taxes would see investment in the UK start to rise quickly, contrary to the doomsters that consider our apron strings should always be entwined — we shall see.
I think I’ll wait for the government to cancel Brexit – civil war breaks out and the stock market crashes – maybe then it might be as apt to just buy an index and watch the darn thing yo yo all over the place for a while.
You have to look on the bright side mind 🙂
LR