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Unilever - margin growth under the microscope

George Salmon | 31 January 2019 | A A A
Unilever - margin growth under the microscope

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Unilever plc Ordinary 3.11p

Sell: 4,314.00 | Buy: 4,314.50 | Change 10.00 (0.23%)
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Unilever's underlying sales rose 2.9% in the fourth quarter, with all divisions contributing to growth.

While new CEO Alan Jope says the group is on track to hit 2020 goals, a tough outlook means 2019 sales growth is expected to be in the lower half of the previously communicated 3-5% range.

The shares fell 2.5% on the news.

The Q4 dividend is set at EUR0.3872 per share, an increase of 8%. That translates to a dividend of 33.61p for UK shareholders.

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Our View

We think Unilever is an attractive long-run growth story.

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

An effective marketing division ensures Unilever's brands are at the forefront of customers' minds, which give it a good chance to grow market share over time. Strong brands also mean Unilever can increase prices, boosting margins and profits. That enables significant reinvestment in the following year's marketing budget. And there's historically been enough to increase the dividend too.

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 keep increasing, although as always there are no guarantees. At the time of writing the prospective yield is 3.5%.

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 group is midway through an ambitious plan to grow margins to 20% by 2020. While progress has been solid so far, analysts have been concerned the group won't hit its targets on time.

While missing targets wouldn't be ideal, we don't think it would impact the long-run investment case. Rivals like P&G and Reckitt Benckiser already deliver margins stretching past 20%, and we think Unilever can get there too. Whether that's 2020 or 2021 isn't a primary concern to us.

Still, a falling share price has pushed the rating down to 18.3 times expected earnings, a shade above the ten year average, but below the more lofty valuations we've seen of late.

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Full year results details

Full year revenue fell 5.1% to EUR51bn, but that reflects unfavourable foreign exchange rate movements and the disposal of the spreads business.

On an underlying basis, sales rose 3.1% in 2018, driven by growth in emerging markets. Lower overheads and marketing spend helped operating margin rise 0.9 percentage points to 18.4%. Earnings per share rose 13% to EUR2.36.

Divisional summary (figures quoted on an underlying basis):

Beauty & Personal Care saw sales rise 3.1% to EUR20.7bn driven by 2.5% volume growth. Skincare brands Dove and Vaseline were highlighted as strong performers. Margins rose to 21.9%.

Foods & Refreshment sales rose 2.3% to EUR18.8bn, with 1.6% from volume and 0.7% from pricing. Innovations included a new Magnum range, and new versions of Knorr rice and pasta pots. Operating margin moved from 16.7% to 17.5%

Sunlight and Domestos helped Home Care sales rise 4.2% to EUR10.1bn, with volume accounting for 2.3% of the improvement and 1.9% from price. Margin increased to 13% from 12.2%.

Net debt rose from EUR20.3bn to EUR20.8bn, reflecting the cost of acquisitions and the fact the proceeds from the spreads sale were returned to shareholders through a share buyback programme of EUR6bn.

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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.