Unilever is a British-Dutch consumer goods corporation. Its three divisions are beauty and personal care, food and refreshment, and home care. Around 2.5 billion people use Unilever products each day in about 190 countries. The company has over 400 brands and Unilever products can be found in nearly seven out of ten households on the planet. The company operates 310 factories in over 70 countries. Unilever’s most important brand is arguably Dove soap, the most popular soap brand in the United States and United Kingdom. Some other brands include Lux, Lifebuoy, Axe, Vaseline, Sunlight, Domestos, Omo, Surf, Knorr, Lipton, Magnum, Ben & Jerry’s, Joko, Glen, Marmite and Robertson Spices. Unilever also invented fish fingers, built a village called Port Sunlight in Liverpool and aired the first-ever television advertisement in the United Kingdom.
The global soap market is projected to grow by 11 percent per annum over the next five years on account of increasing personal disposable income, rapid urbanization, expanding populations and increasing hygiene awareness due to COVID-19 disease. As the largest producer of soap in the world, Unilever stands to benefit from this trend. In addition, sixty percent of Unilever’s revenue comes from its emerging markets business. It has a higher exposure to these markets compared to most other consumer staple companies. Countries such as India and China have a growing middle-income population; a demographic likely to drive Unilever’s sales growth.
The spread of the pandemic has led to significant changes in consumer demand patterns. More time spent at home and the critical importance of hygiene led Unilever to report resilient second quarter results that beat expectations. Cleaning and hygiene products saw the greatest double-digit increases in growth, while the food and personal care segments experienced slight declines. The sale of liquid hand wash grew 155 percent and sanitiser sales grew by more than twenty thousand percent. Parts of the business that have been negatively affected by the crisis, like away-from-home purchases and certain beauty products, should recover as the crisis fades and lockdown regulations ease. Accelerated growth in the higher-margin personal care and home care segments should enable Unilever to improve its profit margin over the coming years. It is also encouraging that Unilever is actively addressing operational issues that led to market share loss during 2019.
Unilever trades at a reasonable 20 times earnings, with a dividend yield of 3.2 percent. Its current valuation discount to its peers is at its widest in a decade. Its recent market share decline is likely temporary rather than permanent and insufficient credit is attributed to Unilever’s defensive profile and dominant presence in emerging markets. It has a portfolio of leading brands, relentless focus on cost-cutting and a solid balance sheet. Robust cash flows enable ongoing investments in its existing brands and in innovation, spurring on long-term growth. Unilever is a fine addition for investors that want to hedge against market cyclicality.
Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria.