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Unilever: Attractive Valuation With Pockets Of Growth Opportunity

Jun. 01, 2020 2:01 PM ETUnilever PLC (UL)16 Comments


  • Unilever has experienced slowing growth in recent years which we believe will change with management’s renewed focus on organic growth and portfolio shifts towards higher growth areas.
  • Looking beyond disruptions from the coronavirus, we see pockets of growth opportunities for Unilever particularly in luxury skincare, health and well-being.
  • The company has consistently delivered margin expansion, high cash generation and stable ROIC, which are testaments to its brand quality and economic moats.
  • The valuation is attractive in our view, with a dividend yield of 3.7% and multiples trading at 7% below its historical average. Our target price suggests a 23% upside.


With over one-third of the world population using its products per day, Unilever (UL) is a high-quality company that consistently generates decent cash flow and returns. The company has several years of slow growth due to competition and changing consumer preferences, and had to issue a sales warning at the end of 2019. With a number of organizational changes and a renewed focus on growth, we believe Unilever is at the start of a journey to reignite organic growth to the higher end of its 3-5% target.

Although the current priority is to manage the coronavirus situation and adapt to rapidly changing consumer purchasing patterns, we believe the medium growth plan remains intact. We see pockets of growth opportunities within Unilever's portfolio including luxury skincare, health and well-being. Combined with a continued focus on cost savings and an economic moat from its strong brand portfolio, we believe Unilever will continue to generate values for its shareholders and is a stock that long-term investors want to hold. With a purpose-driven corporate vision, it also scores highly on a number of ESG metrics which we see as favorable as ESG issues are becoming more important for both consumers and investors.

With a dividend yield of 3.7% and the stock currently trading at a significant discount compared to its peers, we see the current valuation as attractive. Our target price suggests a 23% upside, which represents a good buying opportunity, in our view.

Source: Chart created by author based on Unilever annual report

Plan to reignite growth after a challenging 2019

Organic growth for Unilever has been slowing in recent years, with volume and pricing growth averaging 1.4% and 1.9% respectively in the last 5 years, driven by changes in consumer preferences and intense competition from emerging and value brands. 2019 was a particularly difficult year for

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Comments (16)

Unilever and Nestle ,both solid long term holdings. Nestle has holding in L 'Oreal,a kind of plus. Hold both.
Nice analysis. @Little Sustainable Investor
You have not delivered main reason why UL is trading below its peers, especially vs. Nestle & P&G

Given Covid, (and also before to an extent) markets focus one one thing mostly: Balance Sheet strenght and leverage

Procter and Nestle are superior in both, with a way stronger balance sheet and lower debt/equity ratio. In addition, markets are still not convinced by Unilever's emerging market growth ambitions.

Nevertheless, I think Unilever is slightly undervalued and would prefer it to its peers at current valuation with regards to higher dividend as well.
Little Sustainable Investor profile picture
Not sure what the balance sheet situation is for Procter and Nestle, but I think Unilever is in a strong position. ND/ EBITDA was 1.9x in FY19 and the company has €11bn of cash and undrawn facilities available. It also generates a decent amount of cash, with FCF of €6bn FY19 (51% of EBITDA)

I think the market is also concerned about their low organic growth. as it only achieved 2.9% last year, and this is one of the main reasons behind the weakness in share prices.
Growth has been similar at Procter and Nestle (until recently with new CEO), so that does not explain the difference in stock performance and hence valuation

This is where balance sheet and financial health plays a main part:

Unilever Leverage is 77% vs. P&G at 33% (huge difference)
If growth is stable, leverage is not that much of an issue bust still bear in mind that markets have punished high leverage firms most in Covid period and there is a strong argument for this that makes sense.

Also, higher dividend payout ratio at Unilever vs Procter - they do have way more room to grow dividend. Unilever just recently announced that they consider keeping dividend stable this year. So they would lose they Dividend Aristocrat status.

Also, quite important:

Unilever has a lot of good will in its balance sheet which even exceeds its equity. Good will is accounted for all the acquisitions they made in the past. Good will stands currently at 124% of its equity, so if acquisitions don't work out as expected there is quite a high probability of good will that must be written off directly from equity.

(Just in comparison, Procter has roughly 30% of Good Will accounted in its balance sheet)

(What you also have not discussed is the current double structure with Netherlands/UK. I see this problematic in the long term as there are many double positions and too much bureaucracy to make quick decisions quite hard.)

To cut everything short. I do not see the stock undervalued by 20% right here and don't see it moving into the mid 50s anytime soon. Slight undervaluation right here still makes a good investment case for Unilever at mid to low 40s as in Euro.
Hi, thanks for the anaysis and the comment. Just my point of view: Unilever is betting big on its Beauty & Personal Care portfolio, by far the most profitable category. Problem is, despite all acquisitions and focus, it is just not growing (2-3% last 3 years, below their own guidance). Just as a comparison, L'Oréal delivered a 8% growth in 2019. When you dig into the numbers, in 2019 the B&PC main growth driver was deodorants (+6%), the rest (Hair Care, Oral Care, Skin Care) was again on the low single digit.
Add the fact that for tot portfolio they stopped growing in developed markets (-0,5% in 2019), becoming more and more reliant on emerging markets growth to match their guidance. Volumes share in these markets it is already 60%, so they will just keep growing at the rate of the market, nothing more. I will start adding position only when I will see some of their acquired premium skin/beauty brands starting to perform, for instance in Asia where they have already a good geographical footprint. Otherwise, I struggle to see a bullish argument here.
Nice article, thank you! I have some cash to deploy and I am thinking about my existing position in UL. Bought for 30 Euros per share many years ago, I could double up now at slightly depressed pricing. The kids and I absolutely love Unilever Ice cream, they are the undisputed leader in ice cream here in Europe. The Magnum double cherry is the bomb....
It's a solid play. If your position is not full yet, no reason why not adding to your position right here. Unilever is probably the most attractive play in the consumer staples / food sector at current valuation and has a juicy dividend. Don't expect superior performance but it's a long term solid dividend pick.
@Growthseeker1987 : Thanks, that is similar to what I am thinking. It won't double within a few years but I will get a decent yield with limited risk. I also own Pepsi, Nestle and Hormel, all of which have done okay for me. But UL seems like the best buy of these four right now.
Many thanks for the article. Keep them coming.
Ramon_13 profile picture
Long UL
01 Jun. 2020
Don't minimize the staying power and shrewdness of Older ladies. The new CEO seems to press all the right buttons - and UL will be revived!
You are very positive on this site about UL prospects but this company is overvalued according to me.
could you publish an article about the marketing strategy of UL and its brand strategy
where are the new brands ?
I see many old brands in the portofolio, the anglo-dutch UL is an old lady, respectable certainly, but i have some doubts about its future prospects
Little Sustainable Investor profile picture
Sure, I can look more in-depth on the marketing strategy and brands, and will be interesting to compare with its peers. From my perspective, given the growth potential and CEO renewed focus, I think there is significant upside potential given the stock is trading below its historical multiple and peers.
yes please @Little Sustainable Investor
would be great to see brands in the growth segments, i.e. skin care vs. its peers from L'oreal, LVMH etc.
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