Unilever (LONDON:ULVR) is one of the largest publicly traded personal products company in the world. The company’s market cap is $125 billion. For comparison, Procter & Gamble (NYSE:PG) has a market cap of $220 billion and Colgate-Palmolive Company (NYSE:CL) has a market cap of ‘just’ $60 billion.
The company’s shares are issued in both the Netherlands (UN) and the United Kingdom (UL). The United Kingdom shares are more beneficial to United States shareholders because the United Kingdom does not withhold dividend taxes on United States investors.
Unilever was founded in 1929. The company now operates in over 200 countries and has 400 brands. Some of Unilever’s most well known brands consumer products are listed below:
- Dove soap
- Lever soap
- Axe body spray
- Degree deodorant
- TRESemmé hair products
- Vaseline petroleum jelly
- Q-Tips
The company also has a large food and beverage portfolio. Unilever’s more well known United States based food and beverage brands are listed below.
- Litpon tea
- Hellman’s mayonnaise
- Ben & Jerry’s ice cream
- Klondike ice cream bars
- Breyer’s ice cream
- Knorr seasonings
Unilever Growth Analysis
Note: All of Unilever’s growth stats and financial numbers from this point forward are based only on the United Kingdom based UL shares, not the UN shares.
Unilever has grown its earnings-per-share at 5.3% a year over the last decade. The company’s dividends have grown at a slightly faster rate; 6.2% a year over the last decade.
Most of Unilever’s growth has come from margin improvements. Total sales have actually declined from $59.5 billion in 2008 to $58.8 billion in 2014.
Operating margins have increased from 16.6% in 2005 to 19.4% in 2014. While a 2.8 percentage point boost might not sound like much, it translates over to 16.9% operating income growth.
Going forward, Unilever’s growth will likely continue to be somewhat sluggish. The company has over 400 brands. This is similar to the situation Procter & Gamble found itself in before it underwent its large restructuring project to shed underperforming brands and focus on core brands.
An overly-large brand portfolio is one reason why Unilever’s revenues have stalled. The company is also fighting currency headwinds. Unilever’s financial results are translated into United States dollars. The dollar has appreciated around 20% over the last year. The effect of the strong dollar on Unilever’s financials is a decrease in reported sales and earnings. Currency effects do not have a serious effect on the company’s underlying business or long-term growth potential.
Safety and Recession Performance
Unilever does not offer investors rapid growth potential. The company does offer stability. Unilever’s portfolio of high quality brands in slow changing industries give it a durable competitive advantage.
Soap (Dove, Lever), deodorant (Degree), and body spray (Axe) are not going anywhere. Neither is tea (Lipton), Q-Tips, or Vaseline. Ice Cream (Ben & Jerry’s, Breyer’s) will be consumed as long as people have taste buds. Unilever’s brands will generate strong cash flows for the company for decades to come. The same cannot be said for most businesses.
Unilever’s brand strength and recognition in Q-Tips and Vaseline is especially strong. People often refer to petroleum jelly as Vaseline rather than petroleum jelly, and cotton swabs as Q-Tips. This is the same level of brand domination that Kimberly-Clark (NYSE:KMB) enjoys with its Kleenex brand.
Unilever managed to remain highly profitable throughout the Great Recession of 2007 to 2009. The company’s earnings-per-share through each year of the Great Recession are listed out below:
- 2007 earnings-per-share of $1.75
- 2008 earnings-per-share of $2.54 (all time high)
- 2009 earnings-per-share of $1.68
Unilever’s best year was in 2008. The company still has not eclipsed earnings-per-share highs from 2008. The Great Recession did drop earnings from 2008 to 2009, but did not put the company’s dividend in any jeopardy.
Unilever currently has $15.4 billion in debt on its balance sheet. The company has an interest coverage ratio of 14. In addition, the company has over $2 billion in cash on hand. Unilever is not over-leveraged. The company’s high quality brands help insulate it from recessions and generate stable cash flows.
Unilever Valuation
Unilever currently trades at a price-to-earnings ratio of 21.4. The company is trading for a slight premium to the S&P 500’s current price-to-earnings ratio of 20.2, despite having only mediocre growth prospects.
On the other hand, Unilever does have an above average dividend yield of 3.0%. The company’s high quality brands in slow changing industries make the company a considerably safer long-term hold than the average S&P 500 stock.
Based on these factors, I believe Unilever is trading around the higher end of its fair value at this time.
Total Return Potential and Final Thoughts
Unilever has grown earnings-per-share at 5.3% a year over the last decade. Going forward, the company will likely continue growing in the 4% to 7% a year range. This growth combined with Unilever’s 3.0% dividend yield gives investors expected total returns of 7% to 10% a year.
The real appeal of Unilever stock is its high safety. The company’s consumer products brands all-but-ensure investors will continue to see steady or rising dividends. Unilever is a low risk investment that offers solid total return potential.