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Why Nick Train might be wrong about Unilever

Third quarter fail to reflect the confidence of the famed fund manager
Why Nick Train might be wrong about Unilever
  • Unilever has reported 1.4 per cent underlying sales growth in the year to date 
  • Brands might not be as valuable as Mr Train suggests

Nick Train is rightly proud of his biggest holding, Unilever (ULVR). In a year that the FTSE 100 has crashed under the weight of a global pandemic, the consumer goods giant has delivered 9 per cent share price growth and maintained its dividend. That performance is something Mr Train attributes to Unilever’s strong brand heritage which “has endured for decades”. 

In 2020, it has been the brands in the home and beauty divisions which have driven a resilient performance from the company. Both reported decent, volume-driven sales growth in the nine months to September. 

But Mr Train might be being a little optimistic when he says that “the value of trusted and beloved consumer brands has gone up materially in 2020.” As the world attempts to fight coronavirus by a regime of fierce cleanliness, it is demand for hygiene products which has driven the performance, rather than the strength of Unilever’s brands. A similar trend has been enjoyed by fellow FTSE giant Reckitt Benckiser (RB.) and smaller peer PZ Cussons (PZC).

Indeed, Unilever has not delivered an impressive performance across the board. The food and refreshment business struggled in 2020 as lockdown forced restaurants and events businesses to halt their purchases of Ben & Jerry’s and Magnum ice creams. And sales growth in the home business slipped in the three months to September - consumers are now fully stocked up on Domestos. 

Unilever is also at odds with Mr Train’s second mantra, that “in the 21st century, growth is much less capital intensive”. Unlike the software giants to which Mr Train is referring, Unilever has to spend excessively on brand and marketing initiatives to drive growth. In the 21st century, marketing is more widely available to new, competitive brands and the incumbents must work even harder to keep growing, while also fighting competition from unbranded goods. 

The threat of cheaper competitors is especially problematic to Unilever which, unlike its Swiss peer Nestle (CH: NESN) has historically relied on growth through price inflation, rather than volume. In the 2019 financial year (the last set of pre-Covid numbers), underlying sales growth was driven 1.2 per cent by volume and 1.6 per cent by price. 

That said, Unilever is an incredibly reliable company which has managed to increase margins steadily over the last five years so that - despite an uninspiring sales performance - operating profits have risen at a compound annual rate of 9 per cent. Reinvesting the substantial cash generated from operations back into the business has helped the company generate impressive returns on capital employed over many years - and that is why Mr Train keeps buying.