Unilever is a low-risk play on developing economies.
Washing powder, deodorant, soap, margarine, pasta, ice cream … sorry, am I boring you already? The truth is, there's not much exciting about most consumer products, or the businesses that make them. But when it comes to investing, boring is often a very desirable characteristic.
Think how exciting it was ten years ago to redesign the way we live our lives using the the Internet, or more recently, to derive new and complicated financial products for the benefit of … well, somebody. If you own a producer of foods and household products you're missing out on that thrill.
Take Unilever (LSE: ULVR), for example, maker of brands such as Hellmann's, Bertolli, Persil and Domestos. So far, so boring. But every day, 150m people chose a Unilever product, and add another few pennies to its bottom line.
A truly global player
The company operates in around 100 countries, and buys approximately 12% of the world's black tea, 7% of the world's tomatoes and 4% of its palm oil. It's the world's biggest producer of margarine, ice cream and black tea, and the third largest consumer products company. All of which starts to make it look a lot more interesting.
To some extent, Unilever is a defensive stock, as even in times of recession people don't stop eating or washing. It's not quite as simple as that, though, as in difficult times there is a definite tendency to shift towards store brands and away from 'proper' brand names.
With that in mind, management must balance volume versus price, and tweak margins against a background of volatile commodity prices. Throw in a variable advertising budget and a vast array of currencies, and it becomes clear that running a boring business successfully can be quite a challenge.
The latest numbers
Thursday's third-quarter results illustrate the point: Sales grew 3.4%; prices fell a whisker, and are expected to continue falling over coming months; gross margins improved, but promotional costs were higher. Overall, for the first three quarters of the year, the earnings per share (before exceptional items) are down 6% on the same period last year.
But an important thing about Unilever, and where it has the edge on competitors like Procter & Gamble and Kraft, is its exposure to developing economies. Those everyday brands that many of us take for granted are seen as aspirational in emerging markets. Whether those markets meet expectations remains to be seen, but I think it's fair to assume that they'll grow faster than the developed world, and that all helps Unilever.
Large caps like this are not particularly my cup of PG Tips (yet another Unilever brand), and a price/earnings ratio (P/E) of 16 may not be screamingly cheap, but at 3.8% the dividend yield is attractive. The dividend is covered 1.7 times, with interest covered 4.4 times.
All things considered, I see Unilever (1,794p) as a relatively low-risk play on developing economies.
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