Unilever plc (ULVR) Ord 3.11p
HL comment (8 February 2024)
Unilever reported full-year sales of €59.6bn, down 0.8% largely from negative currency moves. Underlying sales growth was 7.0%, with volumes up 0.2% after returning to growth in the fourth quarter. The group's 30 "Power Brands" drove performance, with sales growth of 8.6% over the year.
Underlying operating profit rose 2.6% to €9.9bn, with margins improving 0.6 percentage points to 16.7%. Free cash flow was up €1.9bn to €7.1bn. Closing net debt was €23.7bn, in line with 31 December 2022.
For the coming year, Unilever expects to see underlying sales growth of 3-5% and a modest improvement in underlying operating margin.
The quarterly interim dividend for the fourth quarter was maintained at €0.4268. A €1.5bn buyback was announced, with plans to commence in the second quarter.
The shares rose 3.8% in early trading.
Volumes are growing again, led by Unilever's biggest brands like Dove and Hellmans. Price hikes have come tumbling back down to earth, from the mammoth double-digit levels seen in the first quarter. That's providing a welcome boost to margins, an area of focus for investors and management.
Protecting the quality of Unilever's brands is the number one priority, and that comes at a heavy cost. Brand and marketing investment now stands at 14.3% of revenue and increased spend is expected to continue. That's all part and parcel with the Group's strategy of locking in long-term customers with well-known, trusted, brands.
There are other levers to pull too. Trimming the portfolio has already been on the cards, so it's not too surprising to hear a renewed focus on some of the largest brands which represent around 75% of sales. The Group's also streamlined both its internal structure and its sales operations.
Turning a beast like Unilever into a streamlined outfit isn't a quick process. But with new management, activist investors on the board pushing for action, and a better focus on more profitable businesses, we're optimistic.
There are specific pockets where improvement's needed. The number of products winning market share is falling, now at 37% on a rolling 12-month basis and a specific area of concern for investors and management. Lower margin products are being removed and consumers are favouring price areas that Unilever doesn't want to operate in. The expectation is for trends to improve again and for that figure to push back toward 50% over the medium term. We're inclined to agree, but it's something worth keeping an eye on.
The 4.0% prospective forward dividend yield and ongoing buyback are currently supported by strong free cash flow and a robust balance sheet. Dependability is an attraction, and we don't see too much upsetting the apple cart here. But, as ever, potential returns can't be relied on.
All in, there are clear signs that the new management team are making progress and Unilever remains a quality business with attractive fundamentals. But, the new strategy is only expected to return the group to sustainable sales growth within the old 3-5% range. We're not convinced there's any catalyst for a material share price rerating coming anytime soon so see the group as a steady compounder. Nothing is guaranteed.
Unilever key facts
Forward price/earnings ratio (next 12 months): 16.6
Ten year average forward price/ earnings ratio: 19.2
Prospective dividend yield (next 12 months): 4.0%
Ten year average prospective dividend yield: 3.5%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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 disclosure for more information.
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