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Unilever - Growth ahead of difficult markets

George Salmon | 20 April 2017 | A A A
Unilever - Growth ahead of difficult markets

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Unilever plc Ordinary 3.11p

Sell: 3,995.00 | Buy: 3,996.00 | Change -6.50 (-0.16%)
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Unilever shares ticked up 1.7% on the morning of first quarter results, which showed underlying sales growth of 2.9% across the group. As previously confirmed, the group is increasing the dividend 12% to EUR0.3585, which means a Q1 payout of 30.21p for UK investors.

Paul Polman, Unilever CEO said "The first quarter shows growth once more ahead of our markets. This reflects our continued investment in both innovations and brand support, and reconfirms the strength of our long term sustainable compounding growth model."

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, recent results have revealed a more downbeat end to 2016 and start to 2017 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.

First Quarter results

Underlying sales growth in Refreshment, Home Care and Personal Care all grew ahead of their markets, with growth between 2.3% and 5.1%, while sales in Foods, impacted by the later Easter this year, were flat. Among the products delivering strong performances this quarter were Sunsilk, Ben & Jerry's and Hellmann's.

Underlying sales growth in Emerging Markets was 6.1%, although Latin America slowed to 3.5%, on the back of lower sales volumes. In Developed Markets, sales fell 1.5%, reflecting weaker consumer demand in both Europe and North America, with both volumes and prices falling.

Looking ahead, the group says market conditions remain challenging, but Unilever remains confident of outperforming its markets again this year, and is expecting growth over the year to be in the 3-5% range.

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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