It’s shaping up as a tough trading year for Unilever(LSE: ULVR) (NYSE: UL.US), the consumer products firm. Last month’s third-quarter report show that, although underlying sales and volumes are up 3.2% and 1.4% respectively for the first nine months of the year, actual turnover declined 4.3%.
Weak markets
The directors reckon Unilever’s markets weakened further during the period as macro-economic conditions continued to put pressure on consumers. Market growth slowed in emerging countries, particularly in China where substantial trade de-stocking took place. In Europe, price deflation and poor summer weather took their toll on the company’s performance, but conditions in North America started to improve.
Does any of that matter to long-term investors, though? It’s true that such conditions brought reduced third-quarter growth, but that performance is still ahead of growth in Unilever’s markets, say the directors. They insist that continuing investment in brands and innovations positions the firm well for long-term growth opportunities that remain intact. Markets look set to remain difficult for at least the remainder of the year, but accelerated initiatives to remove unnecessary cost, simplify the business and ensure that Unilever is both agile and resilient should win through — just as such measures have done in the past.
The firm’s top management team is adamant; during 2014, Unilever will achieve another year of profitable volume growth ahead of markets, steady and sustainable core operating margin improvement and strong cash flow.
Buying weakness pays off at Unilever
Unilever tends to work out well for long-term investors. The firm’s strength is in the basic business model, which sees the outfit produce and market stuff that people want, stuff with rock-solid repeat-purchase credentials, and stuff capable of keeping good flow rates up in the company’s incoming cash streams. Unilever’s powerful brands underpin the story, names such as Lipton, Wall’s, Knorr, Hellman’s, Omo, Ben & Jerry’s, Pond’s, Lux, Cif, Sunsilk, Sunlight, Flora, Bertolli, Domestos, Comfort, Radox and Surf.
The share price remains muted this year, but we may be seeing a buying opportunity. A bet on share-price weakness has always worked out well for investors in the past. Sales or profits might be struggling just now, but the underlying fundamentals of the business model will shine through in the end.
Today’s 2598p share price puts Unilever on a forward dividend yield of about 3.6% for 2015 and the forward P/E ratio is just under 19. City analysts expect earnings to grow by about 8% that year, so Unilever isn’t cheap — quality companies rarely are.
Unilever continues to entice for its longer-term prospects, and there’s a decent dividend payout to keep us warm while we wait for earnings’ growth to reignite. The firm is a good candidate when we think of generating robust long-term total investment returns. Companies with strong trading franchises can really drive wealth creation if we buy the shares at sensible prices.