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Unilever - healthy Q4 means Unilever hits targets

Nicholas Hyett | 1 February 2018 | A A A
Unilever - healthy Q4 means Unilever hits targets

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Unilever plc Ordinary 3.11p

Sell: 4,322.50 | Buy: 4,323.50 | Change 18.00 (0.42%)
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A strong fourth quarter, with sales up 4%, helped nudge full year sales growth up to 3.1%, at the lower end of Unilever's 3-5% target. Operating margins improved ahead of expectations, rising 1.1 percentage points, to 17.5%. The shares were broadly unmoved on the news.

Q4 dividend for 2017 raised to EUR0.3585, representing a 12% increase on last year. The strength of the pound means the dividend has fallen 1.4% in sterling terms, to 31.55p.

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Our View

We're nearly a year on from Kraft's £115bn bid for Unilever.

After swiftly rejecting the offer, Unilever announced plans to ramp up profitability and shareholder returns. That was to be delivered through a rigorous focus on margins and 3-5% revenue growth.

Sales were a little on the disappointing side at the start of the year, but a strong final quarter has seen the group deliver on revenue targets. On the other side of the earnings equation, cost savings are coming in faster than expected boosting profits.

However, Unilever has been saying for some time that it's facing a more difficult trading environment in developed markets and simply put, it's struggling to keep shifting ever greater volumes of product. For now the larger emerging market business is keeping the company moving forward, offsetting negative growth in Europe.

Nonetheless, many of the factors that helped the group build a track record that has seen it raise the dividend every year this century, remain in play. A multi-billion pound advertising budget should ramps up demand for its products, regardless of economic conditions. While one or two Emerging Markets still look difficult in the short term, Unilever's exposure to a growing and increasingly wealthy customer base in these areas should be a long term tailwind.

Following full year results Unilever is trading at 18.9 times expected earnings, a significant premium to its historic average, but below some of the stratospheric valuations we've seen of late. The shares currently trade on a a Prospective Yield of 3.4%.

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Full Year Results

Excluding the Spreads business, due to be sold mid-2018, underlying sales growth rose 3.5%. This reflects an increase in sales prices of 2.4% and volumes of 1.0%. The group proved it was able to raise prices without negatively effecting demand.

Fourth quarter sales were 4% ahead of last year, driven by a 3.2% increase in volumes and a 0.7% increase in prices.

Increased operating margins were largely helped by the groups cost saving programme. The programme is delivering faster than expected, with savings of more than EUR2bn in 2017. This marks a third of the way to the projected EUR6bn by 2020.

The group is continuing to see positive growth in emerging markets, with full year sales up 5.9%. Developed markets saw sales fall 0.6% for the year as a whole, but returned to growth in the fourth quarter. European markets remain particularly challenging, with full both volume and price decreases resulting in a 0.7% fall in full year sales.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not 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.