Unilever: Delivers For Shareholders In A Difficult Period
- Unilever got a buy rating from us about a year back.
- We review the recent results and the stock performance.
- We run comparative valuations against its own history and peers and give you our verdict.
- Looking for a helping hand in the market? Members of Conservative Income Portfolio get exclusive ideas and guidance to navigate any climate. Learn More »
If you are one of the 3.4 billion people that use Unilever PLC (NYSE:UL) products on a daily basis, you can skip this introduction.
Unilever is a consumer goods global conglomerate, and one of the largest of its kind. Its product range comprises beauty & wellbeing, Personal Care, Home Care, Nutrition and Ice Cream. These five categories also form its reportable segments or business groups for financial results.
The above business groups cover several popular brands. Of course, many identify the products with their brand name (and we are guilty of it too) and not the source of origin, so the following graphic may provide a "aha" moment to them.
Our Prior Coverage
The stock hit our price target in half the expected time. March of last year is when we last wrote on it. It was among the cheapest in the consumer staples sector and we were impressed with its then recent financial results. Sure, the operating margins had declined, but the drop was minor considering the prevailing macro conditions. So in relative terms it got top marks from us. The forward estimates looked more than a tad unrealistic to meet in our opinion, however, the company was finally cheap enough to slap a buy rating on it.
Our contention is that when you are under 2.0X on a price to sales ratio, for a quality company like Unilever, you dramatically improve your odds of getting a 7-9% total return. This is not too hard when you are starting off at a 4% dividend yield, as you are doing in this case. Even the earnings yield is close to 6.7%, so you need very little nominal growth to hit your numbers. Unilever also uses relatively low leverage and that insulates it from any credit stress that we might see elsewhere in the levered consumer staples names.
Source: Unilever Hits The Sweet Spot
While we acknowledged the ongoing geopolitical risks and inflation headwinds, we had placed our bets that the monetary and fiscal policy would normalize sufficiently in 24 months to give the commodity prices some breathing room. This in turn would help the company deliver. That is exactly what happened, but in a shorter time frame. Our protagonist delivered and beat several of its peers.
What was particularly satisfying was that we had Hormel Foods Corporation (HRL) as a "Strong Sell" and Unilever outperformed by 45%. Unilever breached our $50 price target in 12 rather than 24 months. So today we review the current fundamentals in light of the macro conditions to see if this one is still a buy in our books.
The sales growth doubled in 2022 compared to the previous year (9% vs 4.5%). While the 2021 number had volume growth make a reasonable contribution to the overall sales growth number, 2022 was a different story altogether.
Q4-2021 was a precursor when volume growth came to a standstill. It was mostly downhill from there for each successive financial result.
Not apparent in the above graphic, but the Beauty and Wellbeing segment actually had a slight volume growth of 0.3% year over year. However, in Q4 it had joined the rest in volume declines. Region wise, Latin America followed by Asia Pacific Africa led the overall growth numbers with Europe being the laggard.
All the business groups were comfortably in the sales growth territory with Home Care leading the charge.
While Unilever results reflected good pricing power, it was still not sufficient to stop the decline in the year over year gross and operating margins.
In our previous piece we had spoken about the unrealistic forward estimates for 2022. We did not think the $2.81 number would come to fruition. While Unilever did not hit that exact mark, it came pretty close at $2.77. At that time, the 2023 estimate was for $3.07 EPS. That, along with the 2024 estimate has been steadily declining.
There is some downside risk to the 2024 numbers in a recession and one cannot ignore the volume trends which need to be reversed soon. The stock is not as cheap as it was last March, and the yield is lower due to price appreciation, despite the recent dividend hike. It is still better priced than it has been for the better part of the last decade.
Of course most of the last decade did not have the interest rates we have today. So by default we would expect a lower valuation and multiple. At present the upside is muted, though one could argue it is cheap at 17X earnings especially relative, to many consumer staples stocks including Clorox (CLX) at 34X, Procter & Gamble (PG) at 25X, and Kimberly-Clark (KMB) at 22X. Generally the relative argument has only held up if you try and do a paired trade. In a generalized market slide, both sets of stocks, cheap and expensive will fall. At present we have to dial back our enthusiasm and we are downgrading this to a Hold/Neutral.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
Are you looking for Real Yields which reduce portfolio volatility? Conservative Income Portfolio targets the best value stocks with the highest margins of safety. The volatility of these investments is further lowered using the best priced options. Our Enhanced Equity Income Solutions Portfolio is designed to reduce volatility while generating 7-9% yields.
Give us a try and as a bonus check out our Fixed Income Portfolios.
Explore our method & why options may be right for your retirement goals.
This article was written by
Conservative Income Portfolio is designed for investors who want reliable income with the lowest volatility.
High Valuations have distorted the investing landscape and investors are poised for exceptionally low forward returns. Using cash secured puts and covered calls to harvest income off value income stocks is the best way forward. We "lock-in" high yields when volatility is high and capture multiple years of dividends in advance to reach the goal of producing 7-9% yields with the lowest volatility.
Preferred Stock Trader is Comanager of Conservative Income Portfolio and shares research and resources with author. He manages our fixed income side looking for opportunistic investments with 12% plus potential returns.
Analyst’s Disclosure: I/we have a beneficial short position in the shares of CLX either through stock ownership, options, or other derivatives. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.