I definitely didn’t intend to deploy any more capital this month. I was quite content with the addition to my burgeoning position in American Realty Capital Properties Inc. (ARCP) on the very first day of the month, and then quickly thereafter my decision to add to my position in BHP Billiton Plc (BBL) for the first time in more than a year due to a cheap stock on the back of falling commodity prices.
But I’ve been waiting for a little volatility (read: opportunity) in the market which would allow me to squeeze just a little extra cash out of my bank account for high-quality stock or two at what I felt would be an attractive long-term price relative to intrinsic value. And I felt one of those opportunities knocked on my door, which put me in the wonderful position to answer.
Over the last month, the S&P 500 index is down 4%. Of course, this is music to a long-term investor’s ear, because many stocks within the index are down to varying degrees as well. So I’ve been eagerly humming to the music all along, giddily buying stocks in a more rapid manner than usual. So what you see here is the manifestation of what I’ve been talking about for years. Up or down market, buying shares in high-quality businesses that reward loyal shareholders with regular and reliable increasing dividends is and always will be my modus operandi. And I obviously prefer to buy when the market is down, which is why I’ve been so aggressive over the last week or so.
I purchased 30 shares of Unilever Plc (UL) on 10/10/14 for $40.47 per share.
Founded in 1930, Unilever Plc is a global manufacturer and supplier of consumer products. They sell their products in over 190 countries.
The company operates in four segments: Personal Care (36% of fiscal year 2013 sales); Foods (27%); Refreshment (19%); and Home Care (18%).
They further operate in three geographical product areas: Asia, AMET (Africa, Middle East, Turkey), RUB (Russia, Ukraine, Belarus) (40% of FY 2013 sales); The Americas (33%); and Europe (27%). Emerging markets comprise 57% of UL’s business.
Unilever sports 14 €1 billion brands, among a portfolio of more than 400 brands. Some of their most popular brands include: Axe, Ben & Jerry’s, Breyers, Country Crock, Dove, Hellman’s, Klondike, Knorr, Lipton, Magnum, St. Ives, Surf, and Vaseline.
It’s important to note that Unilever was founded in 1930 following a business merger between Naamlooze Vennootschap Margarine Unie of the Netherlands and Lever Brothers Limited of the UK. As a result, two controlling companies were set up – Unilever N.V. and Unilever PLC. They operate effectively as a single economic entity. Both the Dutch and UK companies offer ADR shares that trade on the New York Stock Exchange, and both stocks represent equal ownership in Unilever. This article will be referencing the (UL) shares, which are the ADR shares of London-listed Unilever Plc. These shares do not have any foreign dividend tax withholding due to a tax treaty between the US and the UK. Unilever N.V. is listed in Amsterdam, and its ADR shares trade on the NYSE under (UN).
UL sells consumer products across the globe. As such, most of their results show fairly secular growth. Though their results vary depending on product demand and currency fluctuations – and the Great Recession took a small toll on growth – you can largely see upward revenue and net income trends over five-year and ten-year periods.
So let’s take a look at the previous ten years and see what UL has generated in regards to growth. Their fiscal year ends December 31. Unilever reports operational results in euros, but I’ll be using dollars as reported to S&P Capital IQ for sake of consistency.
Revenue (referred to the company as turnover) grew from $54.282 billion in fiscal year 2004 to $66.106 billion in FY 2013. That’s a compound annual growth rate of 2.21%. Not very impressive, but sales growth has picked up since 2009. Management has noted target revenue growth in the 3% to 5% range moving forward.
Earnings per share increased from $0.83 to $2.20 during this period, which is a CAGR of 11.44%. Very solid results in profitability, and like revenue has been picking up again since 2009. S&P Capital IQ predicts EPS to grow at a compound annual rate of 9% over the next three years. This seems like a reasonable long-term growth rate based on previous results and management expectations moving forward.
UL might not get a lot of attention among US dividend growth investors because it’s not featured on David Fish’s CCC list; however, it has been a serial dividend grower in its native currency. Unilever declares dividends in euros and converts them into the appropriate currency using the spot rates of exchange two days before the announcement date. As such, the ADR UL shares don’t sport a consistent dividend growth record in dollars due to currency effects.
In dollar terms, UL has increased its dividend from $0.73 in FY 2004 to $1.40 as of FY 2013. That’s a CAGR of 7.50% over the last decade, which is rather solid considering the yield on shares right now, at 3.74%. That yield was determined extrapolating out the most recent declared quarterly dividend of $0.3792 per share (which includes the $0.005 ADR fee).
In their native currency, UL has been increasing its dividend since at least 1999. I see no reason that won’t continue for the foreseeable future, as the company specifically calls out dividend raises in annual reports.
The payout ratio stands a bit high, at 61.7%. However, this is ratio is approximately what the company has comfortably maintained over the last decade. Furthermore, it’s relatively in line with major peers, like The Procter & Gamble Company (PG).
The balance sheet appears slightly leveraged, but not overly so. The long-term debt/equity ratio stood at 0.75 at the end of FY 2013, while the interest coverage ratio is just above 15. Overall, these are solid numbers.
Profitability compares well with major peers. Net margin has averaged 9.80% over the last five years, and margin has been improving over the last couple of years. Return on equity has averaged 33.04% over this same time frame.
Underlying annual sales growth has averaged 5.1% over the last five years. Meanwhile, underlying volume growth has averaged 3.1% per year over that period.
Unilever has long-established brands. And they are extremely well-positioned to grow in emerging markets, where much of the growth is likely to be had over the next 10-20 years. It’s long been understood that potential growth in developed markets is somewhat limited, and you can see this in their most recent results – sales in emerging markets for UL grew by 8.7% for FY 2013, while sales in developed markets were negative 1.3%.
What I really like about Unilever is that their brands are spread out well between food brands and personal/home care brands. So you’ve got plenty of diversification there within the company as far as what products they offer and in what markets they serve.
Furthermore, the company appears to attack certain product segments with ferocity. You’ll notice they don’t just have a brand in ice cream; they have multiple dominant brands in ice cream. They similarly represent themselves through a saturation strategy in shampoos, soaps, deodorants, and butter. I find that to be effective, especially when multiple brands the company offers are well known on an individual basis.
One interesting aspect is that they’ve been consolidating the business a bit recently by increasing focus on higher-margin personal care products. Unilever recently completed the sale of Ragu and Bertolli pasta sauce brands for $2.15 billion, which seems like a solid price considering the combined brands generated annual sales of over $600 million. Unilever also sold the Slim-Fast brand to a private equity firm, but will retain a minority stake in the business.
I like to invest when the odds are on my side. And I like to invest in companies that produce ubiquitous products and/or services that people all around the world want and/or need. I also like business models that are easy to understand.
Well, Unilever checks it all for me. Odds are great that people are going to continue consuming food products like Ben & Jerry’s ice cream and Hellman’s mayonnaise. And once a consumer experiences good results with their personal products, it’s likely they’ll continue to use them. Moreover, what’s more ubiquitous than soap, shampoo, and deodorant? These are recession-proof products that are found in almost every home across the world. The company states that more than 2 billion consumers worldwide use a Unilever product every day. What’s not to like about that?
Unilever seems to differentiate itself from some major peers through its desire to reduce its environmental footprint/impact. The company espouses its long-term vision to double the size of the business, while simultaneously reducing its footprint. It hopes through this initiative to increase its positive social impact. They have released their Unilever Sustainable Living Plan, which set out the following goals by 2020: Help more than a billion people to improve their health and well-being; halve the environmental footprint of its products across the value chain; source 100% of its agricultural raw materials sustainably and enhance the livelihoods of people across its value chain.
The company appears to have multiple competitive advantages. Their brands give them pricing power, which means that over time they should be able to pass along rising input costs and then some to consumers. Furthermore, their supply chain and distribution network gives them efficiency that smaller players will naturally lack. And their exposure to emerging markets gives them huge advantages over rivals who are more exposed to slower-growing developed markets.
This appears to be a low-risk, safe investment to me. I was personally attracted to that aspect of the business as some of my more recent stock purchases were a bit higher on the risk-to-reward scale. I definitely have a desire to continue increasing my exposure to defensive investments based in the consumer space, like Unilever.
However, there are risks present. Primarily, there is always competition to worry about. While they have strong brands across their portfolio, there are strong brands as well from rivals that compete for shelf space and consumer loyalty/spending. In addition, economic conditions in developed markets and/or emerging markets could deteriorate and cause growth problems for the company.
UL shares trade for a P/E ratio of 17.90, which is in line with its five-year average ratio and the broader market. As always, I’m more than happy to pay a fair price for a great business. Moreover, this purchase comes after shares in UL have declined more than 7% over the last month.
I valued shares using a dividend discount model analysis with a 10% discount rate and a 6.5% long-term growth rate. That growth rate appears fair and conservative to me, as it’s both lower than UL’s 10-year EPS growth and the rate at which it has grown its dividend. The DDM analysis gives me a fair value on shares of $46.15, which implies a solid margin of safety at today’s price.
Unilever is one of the largest branded food and personal care products companies in the world. They have 400 brands, of which 14 generate more than 1 billion euros in annual sales. Their exposure to emerging markets is enviable, and their portfolio of recession-proof products is easy to understand and likely to continue generating increasing profits for years to come. They’ve been a great company in terms of rewarding shareholders with rising cash dividend payouts, and I see no reason this won’t continue for the foreseeable future.
This purchase adds $45.50 to my annual dividend income, based on the current $0.3792 quarterly dividend.
I’m going to include current analyst valuation opinions below, as I use these to concentrate my reasonable valuation estimate:
Morningstar rates UL as a 4/5 star value, with a fair value estimate of 46.00.
S&P Capital IQ rates UL as a 2/5 star sell, with a 12-month target price of $39.00.
I’ll update my Freedom Fund in early November to reflect this recent purchase.
Full Disclosure: Long PG and UL.
What are your thoughts? Do you like UL? Does this appear to be a good long-term investment?
Thanks for reading.
Photo Credit: Stuart Miles/FreeDigitalPhotos.net