01 Feb Why Unilever plc is a Footsie stock I’d buy without delay
FTSE 100 consumer goods giant Unilever (LSE: ULVR) has had a turbulent year. Less than 12 months ago, its board was fighting off an aggressive £115bn bid from US group Kraft Heinz and Warren Buffett.
Chief executive Paul Polman then had to find a way to deliver faster profit growth and higher shareholder returns, without selling the business.
Today’s full-year results suggest to me that Mr Polman is succeeding. Sales rose by a modest 1.9% to €53.7bn in 2017. But the group’s net profit rose by 16.9% to €6.5bn, while its operating margin rose by 1.7% to 16.5%.
These figures represent a healthy increase for a £111bn company. Today I want to explain where the growth is coming from and why I believe the shares are worth considering.
2 big growth opportunities
Brands such as Dove, Knorr and Comfort are popular in many counties, but the group is also skilled at tailoring products to suit specific markets. One of the secrets to Unilever’s long-term growth has been its successful focus on emerging markets, which now account for 58% of sales.
Last year saw the group’s total underlying sales rise by 3.5%, due to a 2.4% increase in price and a 1% increase in volume. These gains were only possible due to emerging markets, where underlying sales rose by 5.9%. Volumes rose by 1.6%, while prices climbed 4.2%.
In contrast, underlying sales in developed markets fell by 0.6%. Volume and price growth were both negative. The company admitted that “increased promotional intensity” — or discounting — resulted in slower volume growth, especially in North America.
Management hope that recent acquisitions such as Dollar Shave Club and Living Proof will help restart growth in developed markets. But turnover from these businesses is relatively low compared to some more established brands, so I think it could be a while before we see the benefits of these deals.
Unilever’s brand portfolio is one of the firm’s key attractions. But I find the quality of its finances to be even more tempting.
Last year saw underlying earnings climb 10.7% to €2.24 per share. This growth was supported by free cash flow, which rose by 12.5% to €5.4bn, or around €1.93 per share.
These figures confirm for me that good cost control and high profit margins continue to drive strong cash generation. This is important because it allows the group to fund dividends and acquisitions, without relying too heavily on debt.
Although net debt rose from €12.6bn to €20.3bn last year, this was mainly the result of €5bn of share buybacks. These were carried out to boost earnings per share and support a higher share price. I wasn’t keen on this decision, but I believe the resulting level of borrowing is still reasonably safe.
Why I’d buy
I have mixed feelings about Unilever’s more aggressive approach to growth. But I’m still very tempted by this profitable, high-quality business.
The share price has fallen by 13% since peaking at £45.57 in October, while earnings have risen by 11%. Earnings growth of 8% is expected this year, giving the shares a 2018 forecast P/E of 19 and a prospective yield of 3.4%. I believe Unilever could be worth buying at this level.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.