Unilever: one for the stock pot

And ‘across the globe’ is no exaggeration; Unilever sells its wares into 190 countries. What’s more, 60 per cent of group sales stem from emerging markets – geographies that typically offer up fast growth based on faster population growth and the emergence of middle-class consumers. Such scale and brand strength is an extremely attractive investment quality – diversification can allow for a company’s more resilient revenue streams to temper declines seen elsewhere during times of economic difficulty while leading brands confer pricing power to their owner.

Among other things, these attractions can be seen in Unilever’s impressive dividend record. Over the past 38 years, it has grown payouts by 8 per cent annually on average, with no reductions. Those returns to shareholders are underpinned by strong cash generation. Free cash flow almost doubled between 2010 and 2019, rising from €3.4bn (£3bn) to €6.1bn.

Aside from covering the dividend, that cash flow is important  to reinvest in the long term health of the business. The group has continued to inject money into areas that it believes will enhance its future growth trajectory.

And, seen over an extended timeframe, that expansion strategy appears to have worked. Unilever's underlying sales (which exclude the impact of acquisitions, disposals and currency) rose by an annual average of 3.3 per cent between 2014 and 2019. Simultaneously, the gross margin edged up from 41 per cent to 44 per cent, helped by an effective cost-saving programme. Meanwhile, the underlying operating margin climbed from 15.5 per cent to 19.1 per cent, which has helped take return on invested capital (ROIC) – how much operating profit after tax Unilever gets from every euro invested in the business – to 19.2 per cent. The impressive ROIC is an acid test that reinvesting cash is worth it.

These are key reasons that the stock is a favourite among a number of top fund managers, including Nick Train, who counts Unilever as the number one position in his top-performing Lindsell Train Global Equity Fund and a top 10 holding in the equivalent UK fund. It helps that Unilever has strong ambitions around sustainability and diversity. The group recently unveiled plans to spend €1bn through to 2030 on removing fossil fuels from its cleaning products. And more than half of its managerial roles are held by women.

Even so, there are questions about how Unilever can maintain growth and defend its brands. Last year, underlying revenue growth fell short of expectations at 2.9 per cent – or 2 per cent on a reported basis. This reflected a marked slowdown in some higher-growth geographies, including South Asia and West Africa. The group had previously targeted a multi-year range of 3-5 per cent growth.

The trouble is that Unilever and its fellow behemoths are operating against a rapidly changing competitive backdrop. The rise of digital marketing and social media is giving smaller, local brands an opportunity to challenge the marketing might of incumbents.

But Unilever is not standing idly by. In a bid to accelerate growth, the group is working to bring an “articulated purpose” to its brands, which resonates with consumers. It is also driving its presence in e-commerce. And it is reworking its portfolio, disposing of non-core businesses, which includes the €6.8bn sale of its spreads business in 2018, while boosting exposure to higher-growth markets. To that point, the group has made more than 30 acquisitions over the past five years, and nine in 2019 alone.

Progress on those goals was evident at the 2020 half-year mark, when lockdown sent online revenues soaring by 49 per cent, reaching 8 per cent of total turnover. And even though Covid-19 dampened Unilever’s out-of-home revenues, second-quarter underlying sales dipped by just 0.3 per cent, aided by surging demand for hygiene products. Analysts had expected a 4.9 per cent decline.