Unilever is one of the biggest consumer goods businesses in the world, but in recent years and by its own chief executive’s admission it has underdelivered in terms of its growth, productivity and returns.
The FTSE 100 group is home to more than 400 brands covering the homecare, food and personal care sectors, with its household names including Dove deodorant and Hellmann’s mayonnaise. The idea is that diversification improves the resilience of its profits and its vast scale allows it to spread its centralised costs over more revenues.
For years this made Unilever an investors’ favourite, but focusing on the essentials in such a sprawling business has become increasingly difficult. In 2018 its return on invested capital, which measures how effectively it profits from its investments, was an enviable 28.9 per cent; last year it was only 16 per cent.
Investors are pinning their hopes on Hein Schumacher, Unilever’s boss who joined the business last summer, and a turnaround project that promises a renewed focus on its best brands and to offload less profitable divisions, including a possible demerger of its ice cream business. Yet Schumacher’s “growth action plan” is but the latest in a long series of strategic overhauls, after 2010’s “sustainable living plan”, 2016’s “connected 4 growth’ and 2022’s “compass for sustainable growth”. Will this one really be any different?
Schumacher has nudged up the group’s growth targets, from 3 per cent to 5 per cent to the “mid single digits”, and has announced €800 million of cost savings, cutting 7,500 jobs from its 128,000-strong workforce, with restructuring costs of about 1.2 per cent of group turnover.
The decision to scoop out its ice cream business seems a sensible one. It is much more capital-intensive, partly because of the freezing process, with operating margins of 10.8 per cent in 2023 compared with an average of 17.5 per cent in its four other divisions.
If the demerger is successful in reducing the group’s complexity and in sharpening its focus on growth, shareholders may be eyeing its food business next. A more concentrated personal and homecare group has a nice ring to it. Indeed, Unilever’s most recent trading update showed that demand for its cosmetic brands had been particularly strong. Underlying sales throughout the company grew by 4.4 per cent in its first quarter, led by 7.4 per cent growth in its beauty and wellbeing division.
There is some execution risk around the new strategy, but in the meantime the dividend continues to roll on. Unilever has consistently increased cash returns to shareholders. Over the past decade it has averaged almost 6 per cent dividend growth, compared with 4.7 per cent at Procter & Gamble, 4 per cent at Colgate Palmolive and 3.6 per cent at Nestlé, according to FactSet. As it stands Unilever shares offer the highest forward yield of them all at 3.5 per cent.
Unilever still benefits from an impressive brand moat. Dove alone generated more than five billion in sales in 2022. More than half of the group’s turnover comes from emerging markets, with a significant presence in India, China, Brazil and Indonesia, so it should benefit from growth in these countries.
For now, the focus is rightly on organic sales growth, improving margins and cash distributions to shareholders. Slimming down is wise. Analysts at Berenberg, the broker, estimate that the group’s underperforming brands, which contribute about 23 per cent of the top line, could add 0.8 percentage points to organic sales growth and 2.3 percentage points to its gross margins if they were sold.
Investors should be prepared for some volatility in the share price over the next few years as the turnaround project unfolds, but a decent growth story and a reliable dividend are worth holding on to in the long run.
Advice Hold
Why Simplifying structure should support growth, attractive for income
Capital Gearing Trust
Capital Gearing Trust is designed to help investors to preserve their wealth, rather than to grow it. The £1 billion investment trust technically has no formal benchmark, but last year it failed to match inflation. Then again, inflation wasn’t exactly low at the time.
The trust, which has been managed by Peter Spiller since 1982, takes a very cautious approach to markets. Only about a third of its portfolio is invested in funds and equities, through a mix of stocks, infrastructure and property. Just over two fifths of the portfolio is in index-linked government bonds, which reflects its managers’ belief that the world is in a “structurally more inflationary environment”. Thirteen per cent was in conventional government bonds as of the end of April, followed by 10 per cent in corporate credit. The remaining 2 per cent is split between gold and cash.
The trust has a decent track record as a wealth preserver, but beating the consumer prices index has been harder in recent years, given that high inflation. At the end of March, its net asset value return over the year was 1.8 per cent, compared with a 3.2 per cent rise in the CPI.
The company blamed the shortfall on its cautious approach in early 2023, when it believed that the higher cost of capital and sticky inflation would hurt markets. However, the stock market remained bullish. It did well, therefore, across its equity and property allocations, but rising bond yields hit its more defensive allocation.
The outlook this year is more positive: 70 per cent or so of the portfolio is invested in high-quality bonds that are yielding in excess of inflation, which should help to support returns for the next few years.
For those who worry about the fragility of the stock market, especially given the height of American valuations, CGT is a good option for an informed, defensive approach. The trust comes at a reasonable cost, charging a management fee of 0.6 per cent of net assets up to £120 million, then 0.45 per cent on net assets up to £500 million and 0.3 per cent thereafter.
Advice Buy
Why Wealth preservation trust with good track record
