It has been around a month since consumer goods giant Unilever (ULVR) released full year 2020 financial results. The stock price performance since then tells you what the market thought of them, with the shares ending last week around 11% lower in GBP terms compared to their pre-results level. The current share price also represents a circa 14% drop on when Unilever last featured here back in late 2020. At the time, the stock did not strike me as particularly expensive at all. Granted, a price-earnings ratio (“PE”) of just under 20 may have looked uninspiring, but remember the shares are supported by a very high quality business. That ultimately allows Unilever to distribute most profit by way of dividends, buybacks and acquisitions without harming its growth prospects. The Hellmann’s and Dove owner has spent over €45b on dividends and share repurchases over the past decade.
The net result of the above is that future growth need only register broadly in line with recent history. That is to say, underlying sales growth (“USG”) somewhere in the 3-5% per annum range, which also happens to be in line with management’s long-term performance target. Earnings growth could reasonably be expected to clock in a point or two ahead of sales thanks to operating leverage. Adding on the dividend, which yielded circa 3.3% at the time, plus something from buybacks and so on, would then lead to decent shareholder returns overall.
Financial results released last month revealed a pretty decent final quarter of 2020. Fourth quarter underlying sales growth clocked in at 3.5%, though the €12.1b headline sales number represented a drop after taking into account currency movements. That brought full year sales up to €50.7b, a 2.4% drop on a reported basis. Turning to profit, the firm’s operating margin fell to 18.5% from 19.1% in 2019, in part thanks to higher costs associated with COVID. That led to underlying operating profit of €9.4b, a 5.8% drop on 2019. Underlying net income fell 2.3% to €6.5b, or €2.48 in per-share terms (“EPS”). Free cash flow registered €7.7b – way ahead of net income thanks to a reduction in receivables and lower capital expenditures. That helped push net debt down to €20.9b, equal to circa 1.8x EBITDA.
The overall sales numbers mask a lot of what was going on due to COVID. Before the pandemic, the firm had largely seen emerging markets (“EM”) drive overall company-wide growth. In contrast, developed market (“DM”) performance was basically static in the years leading up to 2020. Note that Unilever derives around three-fifths of its sales from EM, which is usually touted as one of its strengths. Countries where the firm enjoys market leading positions include India, Indonesia and Pakistan, among others. Obviously many of those markets enjoy much better demographics and economic growth prospects compared to certain developed markets.
COVID pretty much flipped the above relationship on its head. DM sales increased 3.6% in Q4, driven by 4.6% volume growth, and grew 2.9% for 2020 as a whole. North America USG came in at an eye-opening 7.7% in 2020, driven by 8.1% volume growth. A huge uptick in demand for hygiene products and at-home foods like Hellmann’s and Ben & Jerry’s helps to explain that.
In contrast, EM sales looked much flatter, especially when compared to the 5-6% annual growth numbers achieved before COVID. At €29.3b, full year underlying EM sales increased just 1.2%, though lockdowns probably explain a chunk of that. For instance, the firm’s food service business represents around 20% of its Chinese operations. With cafes and restaurants closed due to the strict lockdowns in the early part of the year, sales obviously tanked. EM sales appear to have recovered somewhat in the latter part of the year, with fourth quarter USG coming in at 3.5%, though they remain below pre-COVID levels.
All-in-all, a bit of a mixed bag as a result of the virus. At-home foods and hygiene products did very well, while out-of-home foods and elements of its Beauty & Personal Care division were understandably hit hard due to lockdowns. COVID related revenue mix also had a negative impact on gross margins, with management putting the figure at circa 40bps.
Unilever shares ended last week at circa 3,855p on the LSE and €45.10 in Amsterdam. That puts the stock at around 18.2x last year’s underlying EPS. Analysts expect underlying EPS to come in at circa €2.55 per share this year, which would knock the PE ratio down to around 17.7. The dividend – recently bumped up to €0.4268 per quarter – currently represents a yield of 3.8%.
Having been bullish at higher prices, it stands to reason that I am even more so following the dip. The firm does face a multitude of issues in the near-term, though. Currency looks set to remain a headwind for one, having knocked off 5.4% from sales and 6.5% from EBIT last year. Management reckoned that currency would represent a circa 4% headwind to sales this year, and slightly more for EPS, based on spot rates in February. Furthermore, the firm anticipates COVID related cost increases to persist too. Those took off around 50bps from the gross margin last year, equal to roughly €250m, with enhanced hygiene and safety measures like PPE taking up around €100m of that. Further restructuring costs of €2b out to 2022 also weigh on the near-term outlook, as does the extent of the ongoing COVID hit to EM performance.
On the plus side, the above appears largely transient in nature. I’d bet that many folks holding Unilever stock view it as a more of a core long-term position. The firm has its headwinds on that kind of timeframe too – competition from discounters, especially in foods, plus more demanding and financially constrained consumers, have pressured DM sales for a while now. Still, the stock’s current valuation does not require exceptional growth from the business in order to do well. Management reaffirmed its 3-5% annual sales growth target, which can translate into higher profit growth as per the introduction. We then have the dividend, which costs the company around €4.5b in cash terms, and now yields 3.8%. That still leaves retained profit in the €1.5-2b per annum area, which can further support shareholder returns and portfolio evolution. Putting that all together, the route to decent long-term returns still looks there.
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