When I think of consumer goods company Unilever (LSE: ULVR) (NYSE: UL.US) , two factors jump out at me as the firm’s greatest weaknesses and top the list of what makes the company less attractive as an investment proposition.
1) Competitive markets
Unilever is making progress penetrating emerging markets with its consumer brands across the personal care, foods, and refreshment and home care sectors. Last year, around 57% of the firm’s revenue came from fast-growing regions, and the underlying sales growth rate in emerging markets is running at about 8.7%.
Such is the power of the firm’s brands, well-known names such as Lipton, Wall’s, Knorr, Hellman’s and Omo. However, the firm’s success doesn’t come without a struggle, as there’s plenty of competition just about everywhere. Unilever certainly isn’t the only consumer products company expanding into new territories.
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When it comes to buying soap powder, food and deodorant, consumers might be loyal to a brand, but often not at any price: a well-pitched deal from a competitor could tempt customers away from a Unilever brand. Such fierce competition keeps firms like Unilever spending on marketing and focusing on cost control. In a competitive market like that for consumer goods, progress can be hard to win.
2) Valuation
Consumable brand-driven products with strong repeat-purchase credentials can lead to robust, predictable cash flow, which companies such as Unilever can use to reward investors and to reinvest into developing and acquiring new products. Although the consumable goods space is well populated, when brands click with customers the results can be satisfactory. Look at Unilever’s record on cash flow and earnings, for example:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Net cash from operations (€m) | 5,774 | 5,490 | 5,452 | 6,836 | 6,294 |
| Adjusted earnings per share (cents) | 121.00 | 140.66 | 145.83 | 161.08 | 162.76 |
| Dividend per share (cents) | 41.06 | 81.90 | 93.14 | 97.22 | 109.49 |
That stable-looking cash flow is attractive for investors, and Unilever has used its cash to keep the dividend growing. As such, investors tend to view firms like Unilever as defensive growers, capable of delivering both capital growth and income.
Such attraction can lead to over-enthusiasm driving share prices too high and, at the moment, Unilever’s share price seems to be ahead of its immediate growth prospects, which introduces a further element of risk to any investment right now.
What now?
Unilever’s forward dividend yield is running at about 3.8% for 2015 and the forward P/E ratio is just over 18. City analysts expect earnings to grow by about 8% that year, so there seems to be quite a lot in the price for future improvements in the firm’s growth rate.
