A Look Back at Unilever
The Marginal Margarine Manufacturer Making Me Miss My Money
It’s been a year since i wrote my thesis on UL 0.00%↑ Unilever, a giant consumer goods manufacturer that had been led astray by an ineffective ESG focused management team over the past few years.
If you’ll recall, the company was trading at around $50 back then, and It’s trading at $51 today, so I thought it was time to look back and see what went on with the company, and what my next steps should be.
If you' haven’t read it yet, I recommend you take a look at my original post here:
The Thesis
Let’s take a look back at what I wrote a year ago to see what I thought about the company, and what the thesis for it would be:
The company has a stable business with recognizable brands
Some of the divestitures are questionable (ie: Tea)
Alan Jope and his management team are problematic and need to go
Revenues and earnings will begin to grow as a result of operational changes
The company will not increase its debt load
The company will continue to pay increasing dividends
The company is overvalued for the growth it has experienced
How has this held up?
Let’s take it point by point:
The company has a stable business with recognizable brands
Despite some divestitures this hasn’t really changed over the past year, and all of the major brands still remain with the company.
Some of the divestitures are questionable (ie: Tea)
Well, they did complete the Tea divestiture, and that combined with a raft of other brands being sold means that the company has continued its “acquisition into sale” strategy that has caused it trouble for the past decade.
I don’t like this, and it’s not a good thing.
Alan Jope and his management team are problematic and need to go
Well, at least we got a win here!
Hein Schumacher is the new CEO of Unilever and Alan Jope is now out!
Mr. Schumacher is an outside hire, coming over from the global dairy and nutrition business Royal FrieslandCampina. This is exactly what we need, and I can only hope that he can turn this ship around, and out of its “stakeholder” mindset.
Revenues and earnings will begin to grow as a result of operational changes
Here too we were right… Though for all the wrong reasons!
As per their latest earnings the company’s turnover increased 14.5% to 60€ Billion, though this includes a 6.2% impact from currency!
Indeed when we take a look at underlying sales growth, that was 9%, with price growth of 11.3% and volume decline of 2.1%!
This is just inflation!
I didn’t want their revenues to go up just because prices went higher, particularly when everyones prices have been going higher!
Earnings too have declined due to increased expenses!
Bad!
The company will not increase its debt load
Net debt decreased from 30.1€ billion in 2021 to 29.4€ billion in 2022.
A good thing, but not as good as hoped, given the massive increases in interest rates and the likely need to refinance part of their current debt.
The company will continue to pay increasing dividends
On the bright side the company paid 1.5€ billion in buybacks and 4.3€ billion in dividends during 2022.
On the dark side, the company has not increased its dividend going forward.
The company is overvalued for the growth it has experienced
Well, both using the old valuation methods, and the new ones it’s clear that the company is still over valued.
Even the bullish view on the company is below its current share price, primarily as a result of the low growth.
The future
Overall I’m disappointed but not surprised that Unilever has failed to live up to expectations.
Ultimately companies that do not have the shareholders best interests in mind will necessarily end up screwing them over, and Unilever is really no different here.
While I quite like the dividends that I have received since I first purchased them, the lack of growth and the unclear prospects are disappointing.
I’m currently down about $65 on my investment in terms of capital gains, but I did receive $95 worth of dividends, so this investment has been a bit of a wash since i first purchased the company in December 2020!
Yes, Unilever is my longest held company!
My first share was purchased on the 15th of December 2020, a little over 2 years ago!
The investment so far has been a wash, so the question is, do I want to give Mr. Schumacher time to try turning it around?
Or should I cut my losses and simply re-allocate this capital elsewhere?
Right now I’m leaning towards cutting my losses, and re-investing it elsewhere, but I might still keep it if i can’t find anything worthwhile.
My current Stance: Sell
What about you? Do you own UL 0.00%↑ ? What do you think I should do?
Unilever still has pretty decent returns when you look at the operating margins, return on capital employed and many companies would envy the opportunity of increasing prices and getting away with it. It gives a useful yield of 3%.
Warren Buffets quote of "I like to a company that can be run by a chimpanzee, because someday it will be" rings true in Unilever and that it comes through it relatively intact give a good reason to hold onto it.