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Unilever - sales miss guidance but on track for 2020

Sophie Lund-Yates, Equity Analyst | 30 January 2020 | A A A
Unilever - sales miss guidance but on track for 2020

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Unilever plc Ordinary 3.11p

Sell: 3,957.50 | Buy: 3,959.00 | Change -22.50 (-0.57%)
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Full year underlying sales rose 2.9%, balanced between volume and price increases, and driven by growth in Home Care and emerging markets. However, that was below the 3%-5% guided range, reflecting a slowdown in the fourth quarter.

Underlying sales growth is expected to be at the low end of target the range in 2020, and the group's on track for 2020 goals.

Unilever announced a quarterly dividend of €0.4104 per share, and the shares rose 1.6% following the announcement.

View the latest Unilever share price and how to deal

Our View

Unilever is the home of many household staples, and sales of things like Dove soap or Magnum ice creams tend to tick over regardless of the economic climate. That meant news of sluggish growth came as a bit of a surprise.

But we think Unilever's longer-term positives remain in play.

On a typical day, a third of the world's population will use a Unilever product. An effective marketing division means Unilever will hope to grow market share over time, while strengthening brands helps it increase prices and boost margins. Some of the extra profit is reinvested in next year's marketing budget, keeping the virtuous circle spinning, and historically there's been enough to increase the dividend too.

This rinse and repeat approach has led to impressive shareholder returns, and Unilever plans to boost profitability further with cost-savings. The dividend is comfortably covered by earnings and cash flows, and we think there's 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 (EM) exposure separates it from rivals. A 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.

We should add though growth in more developed markets has been difficult lately, with price pressures and tougher trading conditions slowing sales. The indicators aren't flashing red, but it's something to keep an eye on. If things get materially more challenging, there'll be more pressure on other regions to pick up the slack.

The group promised to deliver margins of 20% by 2020, and that finish line is now very much in view. Full year margins were a touch over 19%, so things are moving in the right direction - but that does leave you wondering where profit growth is going to come from in future.

That leads us nicely into the risk of a de-rating. The shares trade on 18.9 times expected earnings, a little way above the ten year average. If profit growth were to slow investors would struggle to justify that rating, leading to a painful fall in the share price. Still, for those prepared to take the long view, we think Unilever has the potential to be rewarding, although there are no guarantees.

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Full year trading details

Ignoring the impact of exchange rates, turnover rose 2.7% to reach €52bn.

Underlying operating margins, improved 0.5 percentage points to 19.1%, with the improvement driven by costs savings, and the sale of a more favourable mix of products. Underlying earnings per share rose 5.8% to €2.51, once the effect of exchange rates is stripped out.

Beauty & Personal Care saw underlying sales growth of 2.6%, mostly driven by volume, and turnover reached €21.9bn. Dove deodorants delivered double-digit growth, but growth in skin care was held back by lower pricing. Operating margins improved 0.7 percentage points.

Foods & Refreshment underlying sales were up 1.5% to €19.3bn thanks to a 1.7% improvement in prices. The hot summer last year meant a tough comparator for ice cream, and volumes declined year-on-year. Lower gross margins meant operating margins fell 0.2 percentage points.

Homecare grew strongly, with a 6.1% rise in underlying sales growth. That includes a 2.9% improvement in volumes, and 3.1% in price.

Increased profitability helped free cash flow rise €0.7bn to €6.1bn. Net debt stands at €23.1bn, compared to €22.6bn in 2018. The increase includes the impact of acquisitions and disposals.

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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.