If I were an investor in Unilever (LSE:ULVR) stock, I’d be losing patience. Unquestionably, the performance has been lacklustre. Even when including dividends, it has returned around only 1% over the last five years. So what’s going wrong?
Good business, bad management?
Terry Smith and Nick Train are two of the UK’s most popular fund managers. Their funds also have large Unilever positions and both have expressed their disapproval of its management. Train described Unilever’s financial performance as “pedestrian“. Moreover, Smith has also criticised management for focusing on ‘woke’ issues.
“A company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot. The Hellmann’s brand has existed since 1913 so we would guess that by now consumers have figured out its purpose (spoiler alert – salads and sandwiches).”
Smith advises the company to focus on being the best version of Unilever it can be. Not something different. Therefore unsurprisingly, he slammed Unilever’s £50bn bid to acquire GlaxoSmithKline’s consumer healthcare business earlier this year. The takeover was rejected as GSK believed the bid fundamentally undervalued it. Meanwhile, many Unilever shareholders also failed to see the benefits of the deal.
Pricing power?
An important metric to assess business performance is return on invested capital. That’s how much cash a company can produce on every invested pound. For example, a return of 10% would mean a company generates £10 of net earnings with each £100 invested in itself. Unilever is currently producing respectable returns in the mid-teens. However it was once capable of returns of 20-25%. Can it get back to that level? Possibly, but probably not in the short term due to soaring inflation.
| Year | Return on Invested Capital |
| 2007 | 22.89% |
| 2008 | 23.44% |
| 2009 | 19.55% |
| 2010 | 22.56% |
| 2011 | 19.41% |
| 2012 | 17.76% |
| 2013 | 18.57% |
| 2014 | 20.61% |
| 2015 | 16.97% |
| 2016 | 16.95% |
| 2017 | 16.97% |
| 2018 | 25.36% |
| 2019 | 14.63% |
| 2020 | 13.14% |
| 2021 | 13.43% |
Unilever made over €52bn in revenue in 2021 (it reports in euros). Of its portfolio of 400+ household name brands, 13 generated €1bn+. Impressively, one third of the world uses its products daily and it boasts a distribution network that can meet global demand.
The huge demand for its products should give Unilever some pricing power but the margin is still expected to take a hit. Input cost inflation was predicted to be €2.1bn in H1 and an additional €2.7bn in H2. In response, Unilever hiked prices by 8.3% in Q1, warning that further price rises were coming.
How high can Unilever raise prices before consumers look for cheaper alternatives to Dove, Knorr and Hellmann’s? The half-year results due at the end of this month might provide some answers.
Time for patience
The share price has fallen over 10% in the last year, bringing the price-to-earnings multiple down from the mid-20s to around 19 today. Unilever stock attractively yields 4%. Despite economic challenges and questionable management decisions, it possesses the foundations for a quality business. That’s why Train and Smith haven’t sold. I’m in no rush to buy though as inflation continues to chip away at the profit margin. Had I bought earlier, I’d hold and be patient for now.
