Why own shares in consumer staples giant Unilever (LSE: ULVR) (NYSE: UL.US)? The investment case can be summed up in three ‘D’s: it’s defensive, it’s diversified and it offers developing market growth.
Defensive
Unilever makes consumer staples, small-value products used by two billion people each day. Those products are either necessities or so desirable as to be the last thing people cut back on.
On top of the reliability of demand, Unilever has tremendous bargaining power with merchandisers thanks to its global scale — on most counts it’s the world’s third-largest consumer staples firm — and it has traction with customers through its global brands. Fourteen brands earn more an €1bn a year, making up over half of total turnover.
The proof of Unilever’s defensive pudding it in its eating. When the FTSE 100 lost half its value between November 2007 and February 2009, Unilever’s shares went down by less than a quarter. By February of the next year they were back in the black, while the market was still well under water.
Diversification
Selling its products in 190 countries, Unilever’s sales are geographically diversified with a balance between Europe, the Americas and Asia/Middle East/Russia. Whatever happens in the global economy, sales will be growing somewhere. That adds an additional dimension of ballast to earnings.
The company’s product groups are personal care (hair and skin care, etc), home care (laundry, detergents, etc), foods and refreshments (ice cream, tea, drinks). Personal care and foods each provide over 40% of operating profits, but while foods have a higher margin, there’s less growth. Unilever has been trimming these brands in favour of a push for more faster-growing personal care products.
Developing market growth
But the biggest opportunities for growth come from Unilever’s position in developing markets. They now account for 57% percent of total sales — a figure that has been relentlessly climbing over the past few years.
Emerging markets saw underlying sales growth of nearly 9% last year, against a 1% drop in developed markets, though currency conversion cancelled out the growth. India, Indonesia, China and Latin America all grew strongly, with Africa very much in Unilever’s sights for future growth.
Like a bond, but not a bond
That currency hit — weak emerging market currencies and a strong sterling — together with investor sentiment turning against emerging markets has hit the company’s shares. They’re nearly 20% off last year’s high, when investors rotating out of bonds treated Unilever’s stock as having bond-like reliability coupled with an equity yield.
The share price slide has disproved that theory, but with the valuation back to a relatively less stretched 18.3 prospective P/E, there’s an opportunity to buy a cornerstone share for your portfolio.