Unilever (LSE: ULVR) should not appeal to any investor. If you're hunting for a long-term capital gain, the company has little in the way of growth prospects. If you require income, the company has little in the way of a dividend yield. Combined with a desperate growth-by-acquisition strategy resulting in opaque financial statements, the stodgy and dodgy Unilever is a no-go area for the sensible Fool.
Low growth
Strong revenue growth is a fundamental feature of any company's long-term success. Unilever fails badly in this department. The latest results from the firm highlighted its continuing pedestrian sales growth. Excluding recent acquisitions and ignoring exchange rate fluctuations, Unilever's turnover increased by a miserable 3% during 2000. The star operation, covering soaps, shampoos and the like, only improved its own top line by 6%.
Looking ahead, is there any scope for Unilever to get rid of its low growth character? When you have sales of £26b, the answer must be no.
Just how much additional margarine, washing powder, ice cream and teabags can the ordinary consumer buy each year? Also, when you hear about the major supermarkets constantly fighting on "ever lower prices" and promoting their cheaper own-label goods, you can always be sure that Unilever's top line isn't being bolstered.
And don't think that emerging markets will rescue Unilever from its plodding growth plight either. At present, well over 70% of group turnover is derived from the mature European and North American markets. It'll be a very long time, if ever, before products sold in China and India begin to have an impact on the group's overall financial picture.
Acquisitions
To combat the low growth problem, Unilever has embarked on a desperate spending spree. However, not only does Unilever's growth-by-acquisition strategy run the huge risk of buying a bad business and of creating widespread logistical problems, there's a genuine feeling of unease over the pricing and accounting of its corporate activity.
Just last year, the company bought three US competitors at lofty price tags. Unilever gladly paid around 30 times earnings for diet food firm Slimfast and quirky ice cream concern Ben & Jerry's. Bestfoods, on the other hand, was bought by Unilever at a price to earnings (P/E) ratio of 24.
The latest round of frenetic M&A activity continues Unilever's seemingly never-ending programme of acquisitions and disposals. The corporate shenanigans give the distinct impression of a lack of creative management talent. Instead of developing its own exciting brands to dominate niche food markets, Unilever would rather overpay for other people's products.
Very importantly, the big question mark hanging over the recent acquisitions is the scope for cost cutting. The obvious reason for a large, low growth company to purchase a smaller, low growth company is to bring it up to its own standard of profitability. But this simply isn't the case with Unilever, as both Slimfast and Bestfoods operated with far higher margins. Therefore, a £700m restructuring charge relating to the latest purchases must shamefully refer to Unilever ridding itself of its own inefficiencies.
The annual exceptional
In fact, exceptional costs are to be a common feature in the Unilever accounts. In addition to the acquisition-related costs, the group is to fork out £3.3b over the next five years to cover its "exceptional" Path to Growth restructuring plan. To put those figures into perspective, Unilever registered a "normalised" £3.4b operating profit in 2000, a figure taken before £1.2b of exceptional costs.
Needless to say, Unilever's financials are complex. Acquisitions, disposals and goodwill write-offs are to be seen all around the accounts. Any impressive performance ratios bandied about by the company's management and supporters must be taken with healthy scepticism. But the real issue at hand? Simply: are the chunky exceptional charges that exceptional?
Valuation and summary
Long-term share price growth is driven by long-term earnings growth. But forget about additional revenues driving Unilever's earnings higher. Although the company is busy increasing profits by margin improvements, cost-cutting can only go so far. Very significantly, only in five years' time will investors be able to determine whether the upfront exceptional charges have produced the promised long-term cost savings.
Of course, every company has a price at which you should be able to secure a reasonable investment return. What price for the slow-growing, acquisition-hungry and financially cloudy Unilever? Given the inherent uncertainties present within the company, the prudent investor should require a significant margin of safety.
At 512p per share, Unilever offers a measly prospective dividend yield of 2.8% and stands on a forward P/E of 16.2 (it should be noted that the earnings forecast is based before exceptional charges). Certainly a rich valuation, given the risks outlined above. Overall, Unilever is neither a "growth" share nor a "value" share. There's absolutely no reason why any investor should get involved with the company. Vote Bear.
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