Unilever (LSE: ULVR) (NYSE: UL.US) may be expensive and it may be facing difficult markets, but it’s one share guaranteed a place in my portfolio.
What’s so special about Unilever? I’d put it under four headings:
- Emerging markets
Unilever is the world’s third-largest consumer staples firm. Its products are distributed in 190 countries, and it reckons that 2bn consumers use a Unilever product each day. That creates massive economies of scale in manufacturing, marketing and distribution. There’s downside protection, as well, in the geographic spread of sales: the company enjoys growth wherever in the world it’s to be found.
Fourteen of Unilever’s brands bring in more than €1bn a year each in sales, with another seven brands vying to join the club. Strong brands generate revenues: consumers in developed markets pay premium prices, while emerging market consumers aspire to the cachet of global brand names. They also provide downside protection: Unilever’s balance sheet might be stuffed with intangibles, but its brands have real monetary value.
Scale and brands together give Unilever market power, putting it in a strong position when negotiating with retailers over prices, promotions and placing on the supermarket shelf.
Superior growth rates have pushed the share of total sales from emerging markets to 57%. But unlike many of the FTSE 100 firms now minting money in China, Unilever’s involvement in emerging markets goes back decades. It boasts more than 50 years’ experience in Brazil, China, India and Indonesia. Lifebuoy soap, created by Lever Brothers in 1895 to help eradicate cholera in Victorian England and, now targeted at the developing world, is said to be available in 50,000 of India’s 600,000 villages. It’s hard to replicate distribution networks and brand penetration like that.
Finally, Unilever’s products are staples, often necessities. Sales are relatively stable, so share prices are as well. Unilever’s stock lost 25% of its value between October 2007 and March 2009, when the FTSE 100 lost 50%. Three years later it had more than recovered the lost ground, while the FTSE was still under water.
That characteristic has pushed the share up to trade on a prospective P/E of 19. Investors have sought its reliable yield at a time when bonds are low-yielding and risky. When quantitative easing stops and interest rates rise, that might put pressure on such bond-like equities. But even if that happens, the ultimate trajectory will be upwards.
Unilever is one of five shares analysed in a special report from the Motley Fool. The companies are all in different sectors and have dominant market positions, healthy balance sheets and robust cash flows. They could form the core of any portfolio. Whatever your investment goals, I recommend you have a look. You can download the report by clicking here — it’s free.
> Tony owns shares in Unilever.