Will The Emerging Market’s Turmoil Hurt Unilever plc?

Back during October of last year, Unilever (LSE: ULVR) (NYSE: UL.US) warned investors that third-quarter sales may be lower than expected. At the time, management blamed weak currencies within Brazil, South Africa and India for the slowdown but remained upbeat on future performance.

However, the last couple of weeks have seen emerging market stocks and currencies take a further beating. In particular, a combination of political instability and a slowdown in quantitative easing from the United States’ Federal Reserve, has sent investors scrambling to ‘safe haven’ assets and out of risker emerging markets.

Specifically, violent political protests in Ukraine, South Africa and Turkey have dented investor confidence within these markets. As a result, billions of dollars are flowing out of these emerging markets and the currencies of Brazil, South Africa, Turkey, Russia and Argentina, to name a few, have all collapsed. A weaker currency means that the price of imported goods and services in these countries will rise, making Unilever’s products more expensive for consumers. 

Key for growth

Unfortunately, these markets are some of Unilever’s key growth markets and this economic turmoil is likely to impact the company’s profits once again. In particular, Unilever generates round 57% of its sales within emerging economies such as India and China.

Actually, according to some City analysts, current turmoil will mean that for 2014, Unilever’s earnings are unlikely to expand from current levels. So, investors are likely to see slow-down in Unilever’s impressive record of growth that has been chalked up over the past decade or so.  

It’s not all bad news

Still, it’s not all bad news. Unilever recently increased its presence within India, possibly one of the largest consumer markets in the world by acquiring an additional interest in Hindustan Unilever Limited.

Further, Unilever’s management are slashing group costs and improving profit margins by streamlining operations. In addition, Unilever’s free cash flow of more than £4 billion for full-year 2013 is highly impressive and easily covers the company’s robust dividend payout. Saying that, it would appear as if Unilever actually has enough cash to be able to increase its already impressive dividend yield of 4%.