It is that time again. Unilever's (NYSE:UL) final results for FY2015 were released last week. They were deemed so good that the market rewarded Unilever with a 3%+ jump in share price. In light of this, it is time to review Unilever [the last time being in an article on its peer Procter & Gamble (NYSE:PG)].
Unilever is one of my longest holdings and--after another top up a little while back--now my second-largest holding. It's appeal is obvious. It only take a few minutes of perusing the back of various branded items across your home to find "Unilever" and its familiar (and, for me, rather attractive) logo repeatedly staring back at you.
For those of us who try to take Peter Lynch's maxim to "invest in what you know" on board, it is pretty much impossible to overlook Unilever when researching potential investments.
Nonetheless, let's dig a little deeper into the FY2015 results (especially related to cash flow) to see how Unilever is looking against previous years and some of its peers.*
First let's take a look at how the company fared from a segment perspective. The company is broken down into four main segments which represent total revenue shares like this:
Personal care, obviously, remained by far the largest single segment within Unilever. It was therefore encouraging to see solid growth from the personal care section:
Also encouraging is the fact that both home care and refreshment saw generous growth rates. What is more, the growth at the underperforming foods segment was also superb to see.
The impressiveness of that set of figures is put into perspective when compared to FY2014's underlying sales growth:
In an increasingly challenging and competitive environment it is wonderful to see Unilever manage to pull growth from all its main segments over 2015. What is more, growth was ahead of 2014 in all but one (Refreshments) segments. It will be interesting to see whether it can maintain that momentum into 2016.
Unilever remains an impressively diversified business. Incidentally, the acronyms mean AMET (Africa, Middle East and Turkey) and RUB (Russia, Ukraine and Belarus):
What is more, we saw growth across all these geographies:
In contrast, 2014 had seen underlying sales shrink by 2.1%.
This is all great. But how well is the business running fundamentally. Did 2015 see sharp improvements in the business efficiency as well as sales? Here I am going to take a look at Unilever's results alongside some of its peers.
First is the matter of the operating profit margin. Leading into the 2015 results, Unilever has been improving its margins consistently from 2012. How did it do in 2015? Not bad:
However, margins have been compressed somewhat. I am not surprised by this, clearly all the consumer companies have been forced to (in developed markets, at least) drive up sales through discounting and deals which have affected profits:
|Net Income (b4 Taxes)||Revenue/Sales|
Such moves, obviously, affect profit and therefore margins but seem to have in Unilever's case paid dividends in the form of growing revenue across the board.
Nonetheless, despite a fall in margins in 2015 they remain stubbornly high which is great news. Sitting above margins in both 2011 and 2012 the improvement has been maintained even with a little slip back.
Clearly 2015 saw Unilever lagging both its recent margin performance and its peer. This is something to keep an eye on. However, as they increasingly look to move out of lower margin businesses I would be surprised if--over the medium- to long-term--we do not see these margins improve further.
Cash Flow Strength
Unilever, like so many of its consumer peers, of course has always had an impressive free cash flow record. As Unilever themselves noted, however, 2015 saw "particularly strong" free cash flow delivery. This is certainly true:
Note: 2014's OCF includes the €800 million disposal-related cash costs put back in.
What this means is that over the last five years (since 2011) CAGR growth in FCF has been about 5.9%. Very good indeed.
What is more, it has continued its remarkably efficient production of that FCF as well. Its CROIC (cash return on invested capital) reveals this. The CROIC (that is, FCF dividend by the sum of debt and equity) gives us an indication of how much cash it produces for capital invested. A CROIC of 10%, for instance, means that for every $1 invested the business produces $0.10 in FCF.
So how does Unilever do? Well, over the last five years it has averaged a CROIC modestly below that of its peers:
However, Unilever's remarkable ability to produce results above and beyond expectations in recent years also includes this metric. In 2014 it ran ahead of its peers. In 2015 it consolidated this lead:
This bodes very well indeed and suggests its activities trying to streamline its operations by dropping low-performing brands and segments and buying in or building up better-performing ones is going well.
Little change occurred on the debt front. Debt increased in 2015 but did so in line with growth in equity. As a result, the debt to equity remained static at around 90%:
This keeps them fairly modestly leveraged compared to their peer group. But what I really like to see is this debt well-covered by FCF. Here Unilever remains impressive:
Unilever remains in line with its peers. With a FCF/Debt ratio sitting at nearly 44% (over 400 bps above 2014) it could, in theory, repay the entirety of its debt from its FCF in a little over two years. This is very encouraging and shows that the business remains in very rude health indeed.
Unilever also looks fantastic on the dividend front. Its strong FCF means that it has a peer-beating FCF yield:
Sitting at 5.4%, its FCF yield is about 0.5% higher than its peers. What is more, its actual yield sits above its peers by a similar margin. Of course, in turn, its FCF payout ratio is slightly higher at nearly 57% as opposed to a peer average of just under 50%.
Nonetheless, this is still a generous coverage considering the strength of their cash flows. I therefore share the belief that dividend growth of about 5% to 6% per year for the next couple of years is very much on the cards.
As a dividend growth play, therefore, Unilever remains a highly attractive business.
With regards to valuation, Unilever is almost exactly in line with its peer group:
It is currently trading at a slight discount to its peers and its predicted EPS growth over the next two years is expected to be at a CAGR rate of about 10%. As such, in the coming years we should see its valuation relative to its peers continue to run at a discount.
So, to the matter of a fair value. I calculate my fair value here by taking the average PE from the last five years and then using this to multiply the average from the consensus EPS for the next two years.
Over the last five years Unilever has received an average PE valuation of around 17.7. Using this plugged into the EPS predictions we would have a:
- Basic Fair Value of $37.75
However, I then like to adjust this by the amount of cash held on their books. Doing so gives us a:
- Cash-adjusted fair value of $38.48
I would argue though, that judged by the current S&P 500 PE valuation of about 20 at present and a consumer peer average well above 21, this does not represent a particularly fair value for Unilever with its stable and growing revenue, profit and FCF figures.
As such, I will instead use the S&P 500's valuation of 20 to give a "fairer" fair value. Doing so gives us a:
- Basic fair value of $42.65, and a
- Cash-adjusted fair value of $43.38^
With Unilever currently trading at around the $42 mark, this would suggest that it is sitting around fair value at present. Certainly for those with a lower risk-tolerance Unilever looks a great long-term pick at the moment.
Of course, if the Emerging Markets continue to see economic pressures affect their consumer growth we will probably see Unilever's share price and valuation come under pressure due to the extent of their exposure to these segments. But as before, I suspect the quality and resilience of Unilever's business will soon see investors flocking back to it.
Unilever is well aware of this and the more general global headwinds noting in the final report that:
We are preparing ourselves for tougher market conditions and high volatility in 2016, as world events in recent weeks have highlighted
Needless to say, this certainly seems to be the case as we edge our way into 2016. Nonetheless, Unilever has proven itself adept in navigating such challenging conditions. Judging from 2015's results, it is well positioned to continue its solid performance in 2016 and beyond. For me, it remains one of the most compelling long-term dividend buys out there and certainly deserves a place in anyone's portfolio.
* In this case the peers are: Procter & Gamble, Colgate-Palmolive (NYSE:CL), Church & Dwight (NYSE:CHD), Newell Rubbermaid (NYSE:NWL), PZ Cussons (OTCPK:PZCUY), Kimberly-Clark (NYSE:KMB), Clorox (NYSE:CLX), Reckitt Benckiser (OTCPK:RBGLY), Tupperware (NYSE:TUP), WD-40 (NASDAQ:WDFC), and Henkel (OTCPK:HENKY).
For those interested in the euro or GBP denominated shares the values would be: Basic FV €39.50 and £29.90, Cash-adjusted FV €40.17 and £30.40.
Unless otherwise stated, all graphs and tables and the calculations contained within them were created by the author. Creative Commons image reproduced from Flickr user jeepersmedia.
Disclosure: I am/we are long UL, PG, PZCUY.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.