In the current market environment, the search for reasonably priced stocks offering appealing dividend yields has become more and more difficult. Unilever (UL, UN) is one of the large global consumer goods companies and has one of the most attractive valuations. In addition, the company offers a comparatively high dividend yield and long-term dividend growth potential.
Unilever's portfolio consists of personal care and home care products, food, and beverages. Like all global consumer goods companies, it has profited from the growth in the emerging markets. However, the worsened economic situation in several emerging countries, and particularly the devaluation of local currencies has had an impact on Unilever's top and bottom line in the recent quarters. Nevertheless, the company has been coping with the situation quite well, the recent Q4 and Q1 results were better than expected and the share has gained in the last months. In the long run, the growth scenario for Unilever's markets remains intact, as the emerging middle classes will continuously drive the demand for branded consumer goods.
Unilever's Company Structure and Shares
Unilever is not as well-known to US investors as some of its competitors, like Procter & Gamble (NYSE:PG) and Colgate (NYSE:CL), however it is the world's third-largest consumer goods company measured in revenue after PG and Nestle.
The Unilever group operates as a single company, but consists of two legal entities and is dual-listed as Unilever NV and Unilever PLC. Unilever NV ordinary shares are listed on the stock exchange in Amsterdam and as New York registry shares on the NYSE (NYSE:UN). Unilever PLC ordinary shares are listed on the London Stock Exchange and as American Depositary Receipts in New York (NYSE:UL). Each ADR represents one underlying ordinary PLC share. All in all, there are 1.7 billions NV ordinary shares and 1.3 billion PLC ordinary shares in issue. Additionally, an equalization agreement between NV and PLC is in place that guarantees that each Unilever NV ordinary share of represents the same underlying economic interest in the Unilever Group as each Unilever PLC ordinary share. Nevertheless, there is a price spread between UL and UN at the NYSE, with UN being 2-4% cheaper than UL.
The company is co-headquartered in London and in Rotterdam (The Netherlands) and it reports in Euro.
Unilever could have been described as the "ugly duckling" of consumer goods companies until several years ago, always lacking behind more successful competitors like P&G. During the last five years with the new CEO Paul Polman in charge, this picture has changed and Unilever seems to be on the right track. Unilever has accelerated growth and its profitability has increased. The company's portfolio has been optimized and streamlined with selected acquisitions and disposals, a process which is still ongoing. Most recently, Unilever has announced the sale of its North American pasta sauces business for $2.15B. In parallel, operational efficiency has improved, capital expenditures have significantly increased during the last four years, resulting in investments in new, more efficient, and sustainable manufacturing capacity which should fuel future growth.
Unilever's combined sales in its four segments totaled €49.8B ($65.7B) in 2013. Personal Care and Foods are the largest categories and also the ones delivering the highest margins.
Unilever 2013 Category Distribution in €
Source: 2013 Annual Report.
Unilever generates only 43% of its sales in the developed, but already 57% in the emerging markets, the most important ones being Brazil, India, Indonesia, China, and South Africa. With these figures, it has one of the highest exposures to emerging markets among consumer goods companies. The emerging markets grew underlying sales by 8.7% in 2013 whereas the developed markets in Europe and North America reported negative underlying sales growth of 1.3% in the same period. Nevertheless, the company is still generating the highest core operating margin in the developed markets, particularly in Europe.
Unilever 2013 Regional Distribution in €
Source: 2013 Annual Report. *AMET=Africa, Middle East, Turkey / RUB=Russia, Ukraine, Belarus.
Unilever is highly profitable with net earnings of €7.5B ($6.9B) on revenues of €49.8B ($65.7B) or a net margin of 10.6%. Based on the 2013 EPS, the P/E stands at 19.3 or at 18.9 based on the 2014(e) EPS which is historically and also compared to other large consumer companies a quite reasonable valuation.
Unilever 2013 Key Figures for UN
Source: 2013 Annual Report.
Unilever's share price performance in 2013 has been quite disappointing with a gain of only 5% in contrast to the S&P 500 which has risen 26% during the year. The main reason for the weak performance of Unilever and other global consumer goods companies in 2013 is the difficult situation in the emerging markets with slowing growth and currency devaluations. Since beginning of this year, the stock has gained momentum and has narrowed the gap, however with a plus of 15% the share is still lacks behind the S&P 500 which has now accumulated a gain of 33%, indicating a relative undervaluation.
Dividends and Dividend Growth
The dividend for Unilever's ordinary shares is announced in Euro and then converted into British pence for the PLC shares and into US dollars for the Unilever NV New York registry shares and the Unilever PLC ADRs. Dividends on the NV shares are subject to Dutch tax law, whereas dividends for the PLC shares are subject to UK tax law. Unilever pays a quarterly dividend and the payment date is identical for all share types. For the PLC ADRs an annual fee of $0.02 (or $0.005 per payment) is deducted, no fee is currently charged for the NV New York shares.
After paying a first dividend of €0.269 in March 2014, Unilever has raised its quarterly dividend to €0.285 for June. This will result in an annual payment of €1.124 or to $1.547 at the current exchange rate and a yield of 3.55%. Since FY2007, the US dollar dividends for the NV NY and the PLC ADR shares are identical. During this period, the Euro dividend has increased overall by 56% or 6.7% annually and the US dollar dividend by 55% or 6.6% annually.
Unilever Dividend Development 2007-2014
Source: Company website.
In 2013 the company's payout ratio stood at 61.4% and it will increase to approximately 66% in 2014, overall a solid level to cover the dividend and to leave some additional room for dividend increases, however possibly not at the same pace as during the past years.
Nevertheless, the overall perspective for the future dividend remains promising for several reasons: The underlying sales growth in the emerging markets is still intact as the middles classes in these countries are continuously growing. The devaluations against Unilever's most important currencies, the Brazilian real, the Indian and Indonesian rupee, and the South African rand have stopped or partly reversed since the beginning of the second quarter 2014. Increased efficiency and a restructuring program which is expected to deliver savings of €500M in the year 2015 and reduced capital expenditure will improve cash flow and support higher dividends.
Unilever has currently no share buyback program in place and no intention to initiate one. Generally, the management is open to return surplus cash to shareholders if after the planned disposals and possible acquisitions, excess cash remains, as stated in the Q1 2014 earnings call.
Nevertheless, in May 2014, the company has bought back rights from trusts which would have been convertible into 70.9 million Unilever shares in 2038, thereby reducing the total number of shares by 2.4%. The deal is supposed to have increase EPS in 2014 by 2%.
Despite the gains since the beginning of 2014, Unilever is still reasonably valued based on its historical P/E and in comparison with other large consumer goods companies. In the mid-term, Unilever should be able to further increase its margins by continuously focusing on its core competencies and improving operational efficiency. The underlying growth trend is intact and Unilever has proven that it is able to grow faster than its markets. In the case of an improving economic environment in the emerging countries and some relaxation from the currency side, the company could surprise positively. The dividend yield of 3.5% is one of the highest among its peers and makes the share an interesting investment for income investors. Additionally, the outlook for future dividend growth remains good.
Disclaimer: Opinions expressed herein by the author are not an investment recommendation, any material in this article should be considered general information, and not relied on as a formal investment recommendation. Before making any investment decisions, investors should also use other sources of information, draw their own conclusions, and consider seeking advice from a broker or financial advisor.
Disclosure: The author is long UN. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.