Interactive Investor

Elephants don’t gallop but Unilever results get thumbs up

This £100 billion company will continue to be seen as a solid defensive play and a core constituent of most portfolios after these results. ii's head of markets talks through the numbers.

8th February 2024 08:59

by Richard Hunter from interactive investor

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Unilever (LSE:ULVR) is at the beginning of what it hopes will be a transformational path to a more streamlined and focused business.

More recent issues have shown that the famous investment adage of “elephants don’t gallop” fully applies to Unilever, whereby large established companies find much difficulty in executing strong growth.

Indeed, for the year ended 31 December, as has been the case for some time, growth has largely been driven by price increases to its products rather than volume growth, and this particular mix is one on which the group has a keen eye.

By way of example, underlying sales growth (USG) for the year of 7% comprised a rise of 6.8% resulting from price increases, and just 0.2% from volumes. For the fourth quarter the picture improved somewhat, with volume growth of 1.8% contributing to an overall number of 4.7% (although this figure was below the expected 5%).

There were certainly pockets of optimism within the USG return. The Personal Care unit, which accounts for 23% of revenues saw growth of 8.9%, Nutrition (22%) added 7.7% and Beauty & Wellbeing (21%) rose by 8.3%. 

The headline numbers were mixed, with revenues for the year declining by 0.8% to €59.6 billion and by 3% in the final quarter to €14.2 billion, both largely in line with expectations. Underlying operating profit was also in line with estimates, growing by 2.6% to €9.9 billion, with underlying operating margin rising above expectations to 16.7%.

Net profit, which took a hit from adverse foreign exchange movements, declined by 13.7% to €7.1 billion, although the pace of decline was better than the feared reduction to €6.2 billion.

The cash generative strength of the group was also again in evidence, with free cash flow rising by a significant €1.9 billion to €7.1 billion. Such strength enabled the dividend to be maintained, where a respectable yield of 3.7% is of some relative attraction. In addition, Unilever announced a new share buyback programme of €1.5 billion, which is clearly a positive statement of confidence in prospects, but may which also may contain some investor disappointment given the €3 billion of the previous year.

In terms of driving growth, the group is likely to increasingly focus on the high quality growth which emanates from its major product lines at the expense of the lesser margin products amid its wide-ranging portfolio.

Indeed, the 30 “Power brands”, which account for around 75% of revenues, are receiving particular attention. Further investment in brand and marketing of €700 million will continually be topped up, and with good reason. These 30 brands saw underlying sales growth of 8.6% and a vital strand of the new strategy is not only to focus on these higher margin brands, but also to add selective bolt-on acquisitions as the opportunities arise at the premium end.

The growth from price rather than volumes is being addressed, but in the meantime the trend is a concern. The greater chances of an increasingly cost-conscious consumer switching to the cheaper, own-brand products of rivals, alongside a large decline in volumes is a possibility which cannot be ignored, even at present this only seems to be happening at the margins. 

The next phase of the strategy from the relatively new CEO will be to simplify the operating model, while honing in on improved competitiveness and performance. The group recognises that its competitiveness is currently “not good enough” and that the percentage of its products winning market share (37%) remains disappointing. This may take some time to wash through fully, but even so the group is maintaining solid momentum as it awaits the further streamline.

For investors, the jury remains out as signs of the strategy emerge, although today’s update provides some promising signs which has lifted the shares in early trade. Prior to the update the shares had fallen by 5% over the last year, compared to a drop of 3.2% for the wider FTSE100 index.

For many, Unilever will continue to be seen as a solid defensive play and a core constituent of most portfolios, while also being held back by its reputation as a company with limited high growth prospects. In the meantime, the market consensus of the shares as a 'hold' is likely to remain intact.

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