We investors have long cherished fast-moving consumer goods company Unilever (LSE: ULVR) for its defensive growth qualities. In recent years, macro-economic headwinds made forward progress challenging for the firm, but that situation seems set to change.
Wind in the sails
Unilever started 2015 with good first-quarter results and the chief executive reckons the firm now sees more tailwinds than headwinds — that’s the most upbeat assessment for quite some time.
At quarter-time, underlying sales grew 2.8%, which includes an encouraging 5.4% sales uplift in those all-important emerging markets. The company achieved this result by growing volumes by 0.9% and by lifting prices 1.9%. It was all enough for the directors to justify a 6% hike in the quarterly dividend.
Steady growth
What we want from an investment in a stalwart such as Unilever, above all else, is consistency.
Defensive, steadily growing, cash-generating investments such as this are crying out to be bought and stuffed into a quite corner of our portfolios. They should be forgotten about, apart from a satisfying glance every so often when the dividend payment drops into the cash account.
However, from time to time we need reassurance that such investments are worthy of the trust we place in them and, on that front, Unilever is making all the right noises. The top man says that Unilever’s priorities are to:
1) grow volume ahead of its markets;
2) steadily improve core operating margin;
3) maintain strong cash flow.
The firm describes this three-point plan as its model for long-term value creation, and points to a consistently rising dividend as evidence of success. For me, Unilever’s approach adds up to three compelling reasons to buy into Unilever’s defensive growth story.
On course for faster expansion
The outlook seems favourable for Unilever right now. The chief executive insists that the actions the firm is taking are starting to put the firm on course for higher levels of growth. Measures include strengthening the innovation pipeline, increasing investment in core brands, and extending operations into premium segments and new markets. Despite high levels of currency and commodity volatility, Unilever expects its initiatives to deliver a further improvement in volume growth during the rest of 2015.
Last year the firm’s most profitable sector was Personal Goods, which delivered 47% of operating profit. The other big sector of operations is Foods, which posted 33% of Unilever’s operating profit. Both those sectors scored an operating margin between 18% and 19%. Less important to the overall result at the moment are the Refreshment and Home Care sectors, which produced 12% and 8% operating profit contributions earned on single digit margins.
Fast-growing brands such as Dove and TRESemmè in Personal Care, and Knorr and Hellman’s in Food, seem set to power the firm’s forward business growth, which should stoke up cash flow enabling further dividend and share-price progress.
