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Unilever - Shares down after tougher trading

George Salmon | 26 January 2017 | A A A
Unilever - Shares down after tougher trading

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Unilever plc Ordinary 3.11p

Sell: 3,958.00 | Buy: 3,959.00 | Change 26.00 (0.66%)
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Unilever describe tough market conditions in 2016, with the fourth quarter bringing particular challenges. The shares dropped 5% on the news.

Our View

Unilever's multi-billion pound advertising budget means that its products remain in high demand, giving the group reliable revenues. As macroeconomic uncertainty has increased, such high-quality earnings have seen shares in demand in recent years.

With a majority of sales in developing markets, Unilever offers the added bonus of exposure to a growing and increasingly wealthy customer base. These overseas revenues mean that the drop in sterling has provided a shot in the arm for UK investors.

The steady rise in the share price means the shares trade on a forward price to earnings (PE) ratio of almost 19.3 times expected earnings, which is around than 50% more than just five years ago. Investors have had to dig a bit deeper to buy the shares, but have been happy to do so as the Unilever juggernaut rolls on. Dividends, sales and profit margins have all increased over the last few years.

The more downbeat end to 2016 has dampened the mood somewhat. While the group has put up a good fight, but a cocktail of difficult conditions in Latin America has begun to bite and European sales are falling amid deflationary pressures.

While Unilever says that a continuation of these headwinds will likely result in more muted growth in the coming six months, the group's business model remains solid enough in our opinion.

Fourth quarter and full year results in detail:

For the full year, sales at constant currency rates increased by 4.3%. Operating margin improved by 50bps to 15.3%, helped by margin-accretive innovations, acquisitions and savings programmes. This combination helped earnings per share rise 7% at constant currency rates. The quarterly dividend is raised to EUR0.3201, translating to a 20% increase for UK investors as a result of sterling's weakness.

In the fourth quarter, Unilever's sales volumes declined 0.4% on last year. With prices an average of 2.6% higher, underlying sales grew 2.2% in the quarter, however with growth of 3.7% for the year as a whole, Q4 represents the weakest quarter of the year.

The group says that in a number of countries, volumes have been weak as consumers and retailers adjust to devaluation-led cost increases. Volume growth was negative in Personal Care and Refreshment, with Foods and Home Care increasing volumes by less than 1%.

European markets remain challenging, as price deflation continues to impact trading. While price rises helped Latin American markets deliver 7.2% sales growth in Q4, this is lower than the double digit growth of earlier in the year. The groups says volumes have held up well, but currency devaluation, high inflation and low consumer confidence have been headwinds. In North America growth improved in 2016, driven by strong innovations in deodorants, dressings and premium ice cream.

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.

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.