Unilever's strong brands should reward its shareholders.
One of the legends of the advertising business, Walter Landor, said that "'Products are made in the factory, but brands are created in the mind." Most people, when they visit the supermarket for their weekly shop, will generally buy the same products. That's the power of brand names and it's something that investors can profit from.
The Anglo-Dutch multinational Unilever (LSE: ULVR) is a food and consumer goods manufacturer with a portfolio of over 400 brands that include Lipton's Tea, Lynx deodorants, Magnum Ice Cream and Persil washing powder. Over 70% of Unilever's €40.5 billion of annual sales come from its top 25 brands. Unilever has delivered considerable returns to its shareholders over the years and looks set to continue to do so for the foreseeable future.
The rivals
In Britain, Unilever's main competitors include food manufacturers such as Associated British Foods (LSE: ABF), Cadbury (LSE: CBRY) and Premier Foods (LSE: PFD). Unilever is also in competition with the own brand products of the supermarkets Morrison (LSE: MRW), Sainsbury (LSE: SBRY) and Tesco (LSE: TSCO) as well as ASDA, even though these supermarkets are also Unilever's biggest British customers. Such is the nature of Unilever's business; your customers are also your competitors!
However, with Unilever having significant operations in over 100 countries it faces competition from a host of national firms and other multinational consumer goods producers such as Reckitt Benckiser (LSE: RB) and Procter & Gamble.
Check out the numbers
When considering a company as a potential investment it's a good idea check its earnings and dividends for yourself.
Unilever produces its accounts in Euros, if we look at the 2008 accounts we see that the diluted earnings per share (eps) were €1.73 (149p when converted at today's exchange rate of roughly €1.16 per £1). The dividend of 60.74p was declared and paid in sterling so there's no need for any conversion. So Unilever's shares are on a price-earnings ratio of 10.1 and pay a net dividend of about 4%.
The diluted eps figure assumes that all share options, warrants and convertible loan stock are exercised (the undiluted eps is slightly higher at €1.79). I'm a fan of the dictum of the economist John Maynard Keynes who said that "it is better to be roughly right than precisely wrong"; so I don't always worry too much about the second decimal place as it's the big picture that counts.
It's also a good idea to check the company's track record over the last few years. It's all very well having high earnings now but what we're really looking for is proof that the company has been able to increase these earnings in the past as this provides a strong pointer towards its future performance. Remember that you are investing for the future, not the past.
Unilever performs well here; in 1999 the dividend was 12.5p and the eps were 25.4p, so that's respective growth of 385% and 487% over nine years. Seeing these sorts of figures reminds me of one of Darth Vader's sayings, "most impressive!" Whilst much of the dividend growth has come in the last three years, this level of growth for a company with such strong brand names gives me a lot of confidence in the future of the business.
The pensions question
The global recession is one reason for Unilever's relatively low rating as investors have become concerned about the possibility of customers switching to cheaper brands and lower-quality goods. Unilever's first quarter results for 2009 which showing a 4.8% rise in sales but quarterly earnings per share fell 44% (though this becomes a fall of 13% if we exclude one-off costs).
I'm not surprised by this, Unilever has to engage in some price cutting to maintain market share; I would expect that Unilever's profits will fall in 2009 but recover strongly in 2010 along with the global economy. More of a concern is the company's pension and medical insurance schemes.
Lurking in the balance sheet is the news that Unilever's pension schemes have a combined deficit of €3.8 billion. This is a significant sum when you consider that the total scheme assets at 31 December 2008 were about €11.7 billion in comparison to shareholders funds of €10.4 billion.
The size of these scheme means that they exert a great deal of influence over the company's financial performance. Unfortunately thanks to the combination of poor stock market performance over the past decade and the increase life expectancies throughout the world, final salary pension schemes have evolved from being a nice way to reward long-serving employees into a problem that threatens the profitability of many companies.
Just to show you how pension schemes can affect a company, consider the change in Unilever's shareholders funds last year. These fell from €12.8 billion in 2007 to €10.4 billion, a fall of €2.4 billion. In the same period the funded pension scheme deficit went from €1.1 billion to €3.4 billion, an increase of €2.3 billion. These figures are close enough to show that there is a strong link between the pension scheme deficit and shareholders funds.
The solution
Thankfully for investors, Unilever closed its final salary schemes to new members in 2007 and required that its employees increased their contributions by 40%. Furthermore, the rebound in global equity markets in 2009 will have helped to reduce the scheme deficit. But the scheme deficit is something to watch in future.
To sum up, Unilever is a high-quality business with very strong brands that has a track record of delivering strong growth in both dividends and earnings. Unilever looks set to continue to reward investors, albeit with a few bumps along the way (particularly its pension scheme), as the global economy eventually gets out of recession.
More from Tony Luckett:
> With The Motley Fool's Share Dealing Service you can buy and sell shares in real time for a flat rate of just £10. It's hard to beat. Open an account for free today. There is no obligation to trade.
> Tony owns shares in Unilever and Sainsbury.
