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Unilever - a change at the top

George Salmon | 29 November 2018 | A A A
Unilever - a change at the top

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Unilever plc Ordinary 3.11p

Sell: 3,887.00 | Buy: 3,887.50 | Change 8.50 (0.22%)
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Unilever's CEO Paul Polman has announced his intention to step down in January after 10 years in the job. He'll stay on for six months to support his successor, Alan Jope before fully retiring.

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Our View

Polman's last act at Unilever was to try and force through a relocation to the Netherlands. A shareholder rebellion meant the plans were abandoned, and as a result he's leaving on a less triumphant note than his successful 10 year tenure deserves.

The new man, Alan Jope, is very much a continuity candidate. He has been running Unilever's largest division for four years and been on the leadership committee since 2011. However, Unilever already has an attractive business model, so evolution rather than revolution seems sensible to us.

The group makes and sells everyday household items like Dove, Magnum and Persil - these items fall into the 'little and often' category, so are typically not that vulnerable to the ups and downs of the economy.

A strong marketing division ensures customers check out with plenty of Unilever products in their trolley. Building strong brands also enables prices to rise, in turn boosting margins and profits. That enables significant reinvestment in the following year's marketing budget.

Consistently repeating this cycle has led to impressive shareholder returns, and Unilever plans to boost profitability even further with cost-saving plans. The dividend is comfortably covered by earnings and cash flows, and we think there's clear potential for the payout to increase, although as always there are no guarantees. At the time of writing the prospective yield is 3.4%.

While other consumer goods groups share these characteristics, Unilever's emerging markets exposure separates it from rivals. Weak sales growth on the back of economic strife in South America is a reminder these can be volatile. But Unilever's wide range of markets means it can weather difficult conditions in a handful of geographies, while growing and increasingly wealthy populations in EM nations should be a long term tailwind.

The shares trade on 19.6 times expected earnings, a premium to the historical average, but below the more lofty valuations we've seen of late.

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Third quarter trading update (18 October 2018)

Unilever's third quarter revenue fell 4.8% to EUR12.5bn. However, reflects headwinds of 5.2% from adverse exchange rate movements and 3.3% from M&A activity - including the sale of the cEUR800m a quarter Spreads business.

Underlying sales growth (USG) was 4.5%, boosted by sales volumes and pricing growth in each of the group's major segments: Beauty & Personal Care, Home Care and Foods & Refreshment. Each delivered USG of between 3.2% and 4.5%, with Dove, Cif and Magnum all highlighted as good performers.

Geographically, Developed Markets saw USG of 1.3%. Hot weather ensured sales of ice creams were strong in Europe, while new Beauty & Personal Care brands in North America were strong.

In Emerging Markets, USG was 5.6%, led by Asia, Africa, the Middle East and Eastern Europe. Latin America was a mixed bag, with Argentina's hyperinflationary environment leading to sharp volume declines. In Brazil, sales rose 10%, helped by a resolution to the truckers' strike and a return to positive price growth.

Unilever CEO Paul Polman said "We are progressively reaping the benefits of our Connected for Growth programme, which is now well embedded throughout the organisation, making us simpler, faster and better connected with our consumers...We continue to expect underlying sales growth in the 3% - 5% range, an improvement in underlying operating margin and strong cash flow."

The quarterly dividend was set at 33.93p per share, up from 31.99p last year.

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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. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.