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Unilever - Pricing power continues to yield dividends

Equity research team | 13 October 2016 | A A A
Unilever - Pricing power continues to yield dividends

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Unilever plc Ordinary 3.11p

Sell: 3,906.50 | Buy: 3,908.00 | Change -15.50 (-0.40%)
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Pricing power continues to yield dividends

Unilever's third quarter results show underlying sales growth across all product categories, as increased pricing offsets a small decline in volumes. The company announced a third quarter dividend of 28.9p per share. The shares are down 1.5% in early trading.

Currency movements continued to negatively impact performance (by 3.4%) resulting in broadly flat turnover.

Our View

Unilever has found itself in a sweet spot in recent times. A combination of low interest rates and macroeconomic uncertainty in developed nations has raised the appeal of consumer goods companies, with investors drawn to the high-quality earnings that their branded goods can provide. The power of those brands is on display once again. That a 15.5% increase in Latin American prices resulted in just a 5% decline in volume is testament to the strength of Unilever's portfolio (Tesco should take heed!).

Investors have also moved to pick up on the growing middle-class in emerging economies, with Unilever again a beneficiary as the group generates the majority of revenue from selling branded consumer goods in these areas. Due to the global nature of revenues, even the value of sterling has provided shot in the arm for sterling investors.

A glance at the company's valuation reflects the favourable environment. Unilever currently trade on a forward price to earnings (PE) ratio of almost 22x, which is more than 50% above what it traded on five years ago.

That might mean investors are having to dig a bit deeper when buying the shares, but it also reflects the good performance of the company in this time. Unilever has raised the dividend consistently in recent years as earnings have grown. Continued growth against some substantial macroeconomic headwinds has been particularly impressive.

With Unilever undertaking a cost cutting programme which should increase margins further, the higher valuation is also a function of the company's increased earnings potential.

A higher PE rating does put Unilever under more pressure to continue growth, but execution has been good up to now. As things stand, we feel that the current climate of macroeconomic uncertainty and low interest rates looks set to prevail for some time yet, so we believe there is little chance of the benign conditions that Unilever have enjoyed in recent years changing.

Third Quarter Trading Update

Consumer demand remained weak in some markets impacting volumes, particularly in Latin America where devaluation has pushed up the cost of living and squeezed disposable incomes. However, pricing increases meant that overall emerging market sales growth was strong, at 5.6%, with developed market sales broadly flat.

Volumes within Personal Care, the largest division, were flat in the third quarter, although a 3.3% increase in pricing helped overall sales grow by 3.1% as the group continued to implement brand extensions and push into more premium segments.

Foods and Home Care saw volumes decline by 1.4% and 1.2% respectively, although price increases meant that underlying sales rose by 1.7% and 3.9% respectively. Knorr and Hellmann's benefitted from updated packaging emphasising the naturalness of ingredients.

Refreshment was the only division to see volume growth in the quarter, up 1.3%, led by the ice creams segment which benefitted from innovation within premium brands such as Magnum and Ben & Jerry's. Overall sales in the division increased 4.5%.

Unilever acquired Dollar Shave Club, Blueair and Seventh Generation in the quarter.

CEO Paul Polman commented;

"With markets remaining soft and volatile, we have continued to transform our business at an accelerated pace. These actions keep us on track for another year of volume growth ahead of our markets, steady improvement in core operating margin and strong cash flow."

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

All yield figures are variable and not guaranteed. The information in this article is not intended to be advice or a recommendation to buy, sell or hold any investment mentioned, nor is it a research recommendation. No view is given as to the present or future value or price of any investment, and investors should form their own view in relation to any proposed investment.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.


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