The shares of consumer goods giant Unilever (LSE: ULVR) (NYSE: UL.US), currently trading at 2,704p, have soared 80% over the last five years, well ahead of the 58% gain for the FTSE 100.
However, the story could change over the next five years, as Unilever’s shares have the potential to deliver a zero return.
Here’s how
Unilever is a brand powerhouse. It’s products are ubiquitous in the food, household cleaning and personal care aisles of supermarkets around the globe. Two of its brands — Knorr and Lifebuoy — are in the top 10 most-chosen FMCG (fast-moving consumer goods) brands in the world.
Another feature of this multinational giant is its exceptional penetration of emerging markets. With getting on for 60% of turnover coming from these markets, the company is well-positioned to benefit from the long-term story of rising wealth in the developing world.
In the very near term, though, earnings are expected to mark time, impacted by adverse currency movements, and “a tough competitive environment”. City analysts are expecting flat earnings per share (EPS) for the current year, but growth to resume thereafter.
Nevertheless, the forecast earnings blip crimps the analysts’ five-year forecasts. The consensus is for EPS to increase at a fairly modest compound annual growth rate of 4.4% from last year’s 132p to 164p by the year ending December 2018 — a total increase of just 24%.
If the shares track earnings, and continue to rate on their current trailing price-to-earnings (P/E) ratio of 20.5, the price will of course rise by the same 24% as EPS, putting Unilever’s shares at 3,362p five years from now.
However, the market would only have to de-rate Unilever from its super-premium 20.5 P/E to 16.6 (still above the FTSE 100’s long-term average of 16) for the shares to be at the same level in five year’s time as they are today.
Many would say — and I tend to agree — that Unilever merits a premium P/E because of the strength of its brands and level of exposure to emerging markets. Nevertheless, a forecast 24% five-year gain, relying on the company maintaining a P/E of over 20, doesn’t look particularly appealing to me. Rich rewards will surely only come if there are serious upgrades to analysts’ earnings forecasts.
Meanwhile, dividends offer only partial compensation for the risk of a below-par performance from the shares. Forecasts suggest a £1,000 investment in Unilever today would deliver around £200 in dividends over the five years — not bad; but not exceptional.