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Unilever - Dividend raised in wide-ranging strategic review

George Salmon | 6 April 2017 | A A A
Unilever - Dividend raised in wide-ranging strategic review

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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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Unilever has concluded a strategic review of its business. Although the shares were little moved following the announcement, the outcome is significant for the future of the business in many ways. The key points are listed below.

  • Unilever has acknowledged that shareholder expectations have been raised as a result of the group rejecting the Kraft bid. The group is now targeting an underlying operating margin of 20% by 2020, up from last year's 16.4%.
  • The review also includes news of higher shareholder returns, comprising a 12% increase in the dividend this year and the launch of a EUR5bn share buyback programme.
  • In order to help facilitate these higher returns, the group is planning to increase its use of leverage.
  • Unilever will seek to simplify its corporate structure, including a review of the dual-listing in the UK and Netherlands.
  • The Foods and refreshment businesses will be combined into one business, while the spreads division is to be split from the wider group, through either a sale or demerger.

Unilever CEO Paul Polman said: "For 2017, we remain on track to deliver underlying sales growth ahead of our markets, in the 3-5% range, and we expect an underlying operating margin improvement of at least 80bps. We feel confident that the changes we are announcing today will accelerate the transformation of Unilever and the delivery of sustainable shareholder value over the long term."

Our View

Kraft Heinz's £115bn bid for Unilever was a shock to the market, but Unilever's frosty response meant the notion of a consumer goods mega-merger evaporated almost as quickly as it appeared.

We can't be sure exactly how the discussions went, but what is clear is that the Unilever board were not for turning. The fact they obviously have plenty of confidence in the group's long term prospects is a good sign, but rejecting of the deal moved the goalposts for some of the bigger shareholders.

This is where the results of its review are most interesting. Higher dividends, share buybacks and more aggressive plans on margin growth could be seen as a move to appease those pressuring the group to increase its focus on short term shareholder returns.

The restructure also includes a decision to split out the spreads business. Brands such as Flora and Stork have been something of a millstone around the group's neck recently. Separating these, rather than pandering to the more sweeping changes that some were calling for, such as disposing of the Personal Care or Foods businesses, feels like the right thing to do. It remains to be seen what the terms are, but a sale could bring in around EUR6.5bn.

The group's plan to step up shareholder returns means leverage is set to rise, with net debt expected to be around 2 times EBITDA (earnings before interest, tax, depreciation and amortisation). However, this should be sustainable for a group with such consistent revenues, especially if the plans to increase margins and cash flow can be delivered.

It is easy to see what Kraft saw in Unilever. A multi-billion pound advertising budget means that its products remain in high demand, giving the group reliable revenues. Its exposure to a growing and increasingly wealthy customer base in emerging markets should be a long term tailwind.

However, full year results revealed a more downbeat end to 2016 in some of these markets. While the group has put up a good fight, a cocktail of difficult conditions in Latin America has begun to bite. Investors can expect more muted growth here, at least in the short term.

Nonetheless, Kraft's interest came after a consistent rise in the group's share price over the last few years. The stellar performance has been backed by a juicy combination of increasing profit margins, sales and dividends. Investors will be hoping that this impressive record can continue.

Unilever featured in our recent article: Which shares could help combat inflation?

Fourth quarter and full year results (26 January 2017):

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.

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