Why the Market Loves Unilever's 11.9% Sales Growth
At 7 a.m. today, the Anglo-Dutch multinational consumer goods giant Unilever (NYS: UL) released its trading statement for the first quarter of 2012. The big news was that global sales were up by 11.9% to 12.1 billion euros, while the quarterly dividend rose by 8% to 24.3 euro cents. However, when converted into sterling the dividend drops by 0.75%, which reflects the euro's weakness during the past year.
While some of the rise in sales comes from last year's purchase of Alberto Culver, maker of the VO5 line of hair-care products, the underlying sales growth of 8.4% is excellent. This reflects Unilever's strength in overseas markets, which, to my mind, makes it a core long-term shareholding for investors who prefer low-risk shares.
The market liked what it saw and marked Unilever's shares up by more than 4% in early trading.
Quarterly results? No thanks
Unilever used to announce a full set of results for its first and third quarters, but current boss Paul Polman stopped doing this a couple of years ago. Polman argues that quarterly reporting is fueling the culture of short-termism among investors and companies as they try to meet the market's expectations, which in turn damages long-term performance.
While many shareholders prefer full quarterly reports, it isn't hard to get a good idea of how a company is performing from these trading statements. Although I prefer quarterly reports from companies that operate in more volatile sectors like oil, it doesn't bother me in the slightest for a stable company like Unilever.
A very staid business
The nature of Unilever's businesses means that it is one of the select few shares that I'd be happy to lock away for 20 years or more. The main reason is that Unilever has a strong portfolio of brands that it has built up over several generations, to the point where they are firmly embedded in the world's consumers' shopping baskets.
Furthermore, Unilever's size -- reflected in its sales of more than 46.5 billion euros in 2011 -- means that it has massive economies of scale that make it difficult for smaller competitors to match its prices. This combination of strong brands and economies of scale forms what Warren Buffett calls a "moat" to protect the business.
Another point in Unilever's favor is that its products are highly resistant to the effects of technological change, which is the enemy of most businesses. After all, there's only so much you can do to deodorant, ice cream, and shampoo, so the majority of innovation in the consumer goods sector tends to be in marketing, distribution, and packaging.
A stable sector, too
Pretty much everything I just mentioned also goes for Unilever's main rival, Cincinnati-based Procter & Gamble (NYS: PG) , as well other major consumer goods companies like Reckitt Benckiser (ISE: RB.L) . When you're selling relatively low-cost branded items, many of which are all but necessities, this means that you have a stable and strong business model.
I'd be confident in predicting that Unilever will still be battling Procter & Gamble for the top place in the global consumer goods market in 2030. There are few other companies or sectors of the stock market where I'd be happy to make such a statement, especially high technology, where history has shown us that even the most dominant company can be just one new innovation away from turning into an also-ran.
Based on the share price of 2,160 pence as I type this, Unilever's prospective price-to-earnings ratio for 2012 is 16.1 where it yields 3.6%. In contrast, Procter & Gamble, at $66.89, has a prospective P/E of 16.5 where it yields 2.9% net of withholding tax.
Unilever's shares usually trade at a slightly lower P/E than those of Procter & Gamble because the stock market values food companies less highly than non-food consumer goods.
So Unilever's food businesses, such as Hellmann's Mayonnaise and Wall's Ice Cream, aren't as prized at its non-food interests like Domestos, Lynx, and Surf. In contrast, Procter & Gamble will soon be out of the food business, having recently agreed to sell Pringles to Kellogg's (NYS: K) .
Unilever has plenty of scope for further expansion in the emerging-market nations where it already gets more than 50% of its sales, and it expects this to rise to 75% by 2020. It already has quite a head start in India, thanks to its 52.1%-owned subsidiary Hindustan Unilever, which was established in 1956.
The importance of the developing world to Unilever can be seen in the trading statement, where sales rose by 11.9%, compared to just 4.2% in the developed world. That's where Unilever's future lies -- not in the highly indebted, low-growth economies of Western Europe.
More information later on tomorrow
Procter & Gamble will announce its results for the third quarter of 2011 through 2012 tomorrow, around midday London time, which will provide more information on the global consumer goods market.
Since P&G is an American company, it produces a full quarterly report -- not just the sales information, like Unilever. I'm happy with both approaches and plan to hold onto my shares in both companies for a long time.
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At the time this
article was published Tony owns shares in Procter & Gamble and Unilever. Motley Fool newsletter services have recommended buying shares of Unilever and Procter & Gamble. The Motley Fool has a disclosure policy.
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