Published December 9th, 2016 by Bob Ciura
U.K. based stocks have sold off over the past few months. The British pound has declined significantly against the U.S. dollar. And, there is elevated geopolitical risk facing the U.K., in the aftermath of this year’s Brexit vote.
One of the stocks getting hit hardest is consumer staples giant Unilever (UL). Unilever stock has declined 18% in just the past three months.
This presents an interesting opportunity for investors. The share price decline has brought Unilever’s valuation down to an attractive level. And, its dividend yield has risen to 3.5%.
In the consumer staples sector, Procter & Gamble (PG) is usually the default stock choice. There is no doubting P&G’s tremendous dividend track record. P&G is a Dividend Aristocrat, a group of S&P 500 companies that have increased their dividends for more than 25 years.
Unilever is not a Dividend Aristocrat. It does not have as long of a history of dividend growth as Procter & Gamble. But Unilever is a strong dividend stock on its own, and is worthy of further consideration by income investors.
And Unilever is more than just ‘considered’ by dividend growth investors. Unilever is the 10th most owned dividend growth stock with dividend growth bloggers.
Unilever is a global consumer products company. It is based in London and has more than 160,000 employees. Unilever was founded in 1885.
The company has a massive product line, roughly evenly balanced between food and consumer products. It has 13 individual brands that each collect more than $1 billion in annual sales, which are:
Overall, the business model is organized into the following categories:
- Personal Care (38% of sales)
- Foods (24% of sales)
- Refreshment (19% of sales)
- Home Care (19% of sales)
Despite a difficult macro-economic climate, Unilever is performing well right now. In 2015, Unilever’s revenue increased 10%. Double-digit revenue growth is very uncommon in the consumer staples sector.
Each of Unilever’s four businesses generated strong growth in 2015.
Source: 2015 Annual Report, page 19
Plus, Unilever’s earnings rose 14% in 2015, thanks to revenue growth plus cost efficiencies and the benefits of share buybacks.
Unilever’s strong performance has continued in 2016. While growth has slowed down a bit, Unilever’s financial results hardly seem to justify such a steep sell-off in the share price.
Source: Third-Quarter Earnings presentation, page 4
Throughout 2016, the company continued to grow underlying sales, which is sometimes referred to as organic sales. This measures sales growth excluding the impacts of currency fluctuations.
The most attractive growth catalyst for Unilever moving forward is expansion into new markets. Unilever has invested heavily to take a leadership position in the emerging markets. The efforts are paying off with high growth rates.
Source: Barclays Global Consumer Staples presentation, page 17
The company’s internationally-focused brands like Knorr are very popular overseas. Unilever generates nearly two-thirds of its annual sales from emerging markets, like China, India, and other.
This is a key edge for Unilever, as the emerging markets will likely exhibit economic growth rates far higher than that of more developed nations.
Another compelling catalyst for Unilever is growth in new channels. The boom in e-commerce has taken the world by storm. Consumer products companies need to make sure they are staying on top of the curve.
Unilever notes that e-commerce now commands 2% of industry sales, while in China it is already 5% and growing. This is why Unilever has built its e-commerce presence. It has strong relationships with established e-commerce giants, particularly in China.
Source: Barclays Global Consumer Staples presentation, page 21
In 2015, Unilever’s e-commerce revenue increased 40%. This is the result of a keen focus on execution—approximately 80% of Unilever’s e-commerce sales are made on the first page view.
Valuation & Expected Total Return
Unilever’s recent share price decline has given investors a better buying opportunity. The stock now trades for a price-to-earnings ratio of 21. This is below the S&P 500 Index, which has a price-to-earnings ratio of 26.
One could argue the stock deserves at least a market multiple, since the company has done a good job growing earnings-per-share.
If Unilever’s price-to-earnings ratio were to rise, and match that of the S&P 500, Unilever stock would return 24% just from multiple expansion.
In addition, Unilever is likely to continue growing earnings-per-share going forward, from the following sources:
- 3%-5% organic revenue growth
- 1% revenue growth from acquisitions
- 1% revenue growth from price increases
- 2% share repurchases
Including the 3.5% dividend yield, annual total returns could reach approximately 11%-13% going forward.
Unilever’s main competitive advantage is its brand strength. Unilever has a massive product portfolio. Every day, 2 billion people around the world use its products.
This creates a certain level of “stickiness” for Unilever. Consumers are reluctant to stop buying Unilever products, even in a recession. After all, people still need food, beverages, and household products, even in a down economy.
Source: Barclays Global Consumer Staples presentation, page 27
Unilever routinely generates return on invested capital in the high teens.
Another competitive advantage is global scale. Unilever has launched an aggressive cost cutting program. It is designed to increase efficiency across multiple functions of the business, including supply chain, overhead, and advertising.
Source: Barclays Global Consumer Staples presentation, page 23
This provides Unilever with earnings-per-share even greater than its rate of revenue growth.
Investors have sold U.K. based stocks indiscriminately in the past three months. But Unilever could be a classic case of the market throwing the baby out with the bathwater.
It offers a 3.5% dividend yield, a balanced product portfolio, and has a plan for growth in new markets.
Unilever’s share price dip to close out 2016 make it one of the more appealing stocks in the consumer staples sector heading into the new year.