Successful companies don’t stand still. They’re always evolving. Today, I’m looking at the changes taking place at FTSE 100 consumer goods giant Unilever (LSE: ULVR) (NYSE: UL.US) — and what they mean for investors.
Founded in 1929 by the merger of British soapmaker Lever Bros and Dutch margarine producer Margarine Unie, the table below shows the group’s business mix today by profit, and the margins in each division.
| Business division | Core operating profit (€bn) | Margin (%) |
|---|---|---|
| Personal care | 3.2 | 17.8 |
| Foods | 2.4 | 17.7 |
| Refreshment | 0.9 | 9.1 |
| Home care | 0.6 | 6.4 |
| Total | 7.0 | 14.1 |
Unilever is increasing its focus on the highest-margin personal care segment: we saw the $3.7bn acquisition of hair products company Alberto Culver a few years ago, and the formation of a global beauty joint venture, Iluminage, just last December.
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At the same time, Unilever is divesting assets in (mainly one of) its other divisions: surprisingly, perhaps — given the margin — foods. Peperami salami snacks, Skippy peanut butter and Wish-Bone and Western salad dressings have all been sold in recent months.
The Financial Times has also claimed Unilever is now soliciting buyers for its Ragú pasta sauce brand in the US, as well as considering the sale of Bertolli, the olive oil business — or even the entire spreads business, which includes the flagship Flora brand.
Essentially, the change we’re seeing at Unilever is the exiting of low-sales-growth food businesses in mature markets, such as the US and UK. The home care division may have the lowest margin, but it delivered the highest sales growth last year (8%), just ahead of personal care (7.3%), with foods bringing up the rear with a paltry 0.3%.
The disposals in mature markets also play into Unilever’s strategy of further shifting its centre of gravity to emerging markets, where sales grew 8.7% through 2013, and contributed 57% to total group turnover.
Now, despite increasing the focus on high-sales-growth business segments and geographies, some of which have lower margins, Unilever is, nevertheless, managing acquisitions, disposals and operating efficiencies to achieve overall sustainable core operating margin improvement: group margin increased to 14.1% in 2013 from 13.7% the previous year.
Good sales growth and increasing margins is a virtuous combination. While Unilever’s headline turnover number was hit by adverse foreign currency rates last year, underlying sales growth was 4.3%. Exchange rates are expected to impact again this year, but to a lesser extent, with analysts forecasting absolute turnover growth of 1% and underlying growth of 4.8%.
The ebb and flow of exchange rates working for and against a global company like Unilever over time is no big deal. The prospect of Unilever delivering good underlying sales growth and sustainable operating margin improvements means the current valuation of the shares at 18 times forecast 2014 earnings doesn’t look massively expensive for long-term investors — particularly as it comes with an above-market-average 3.9% forward dividend income.
