Unilever (LSE: ULVR)

Anglo-Dutch multinational food and consumer goods producer

owns more than 400 brands, including Ben & Jerry's ice cream, Domestos bleach, Flora margarine, Lynx deodorant, PG Tips tea and Signal toothpaste.

2010 ESP +32%
dividend raised by 6.7%.

Strong indicator that global consumers, whilst still smarting from the lingering effects of the recession, are bouncing back.

Strong Brands That People Buy Regularly

A nice business to be in is one where you sell a relatively low-cost product which people buy again and again because it fulfils a need, rather than a want. Whilst Unilever's markets are highly competitive thanks to the likes of Kraft, Nestlé, Proctor and Gamble, Reckitt-Benckiser (LSE: RB) and numerous smaller manufacturers, Unilever's strong brands create lots of consumer loyalty, thus deterring brand-switching and so protecting those all-important repeat purchases.
Most households in the developed world regularly use at least one Unilever product, have used them for many years, and will continue to do so. Unilever's brands are split into three groups; food, personal care and home care (cleaning and washing) with roughly 73% of Unilever's turnover coming from its top 25 brands.

Developing countries are becoming increasingly important to Unilever, with sales growth for the last quarter in Africa, Asia and Latin America all significantly outpacing that seen in Europe and North America. There is plenty of scope for further growth from these regions, particularly in the fast-growing markets of Brazil, China and India where consumers are increasingly adopting parts of the Western lifestyle.

Relatively Secure Sales

The contrast in the recent performance of a company like Unilever and, say, a car manufacturer, is particularly stark. It's relatively easy for a consumer to defer buying a new car for a year during hard times, which is why car makers' sales fell off the proverbial cliff during the last eighteen months. In contrast people don't stop buying food and shampoo, so there was no need for a "cash for cleaners" subsidy by governments to get people to buy Dove soap or Persil washing powder!

Another nice thing about companies like Unilever is that, notwithstanding small changes to their existing brands and the introduction of some new products, they don't need to cope with the highly disruptive technological changes which affect many firms, particularly those in the computing and information technology industries.

After all, there's only so much you can do to deodorant, ice cream, soap and tea, so most of the innovation seen in these markets occurs in advertising, marketing and packaging.

Looking Back To 2009

In my last article about Unilever, written in June 2009, my main concern was not about the global recession. This is because it is perfectly normal for a consumer goods company' profits to fall during a recession as the standard practice is to cut prices to maintain market share.

Unilever was no exception as earnings per share for 2009 fell by 32% whilst its sales fell by a mere 1.7%.

Instead my focus was upon Unilever's pension scheme deficit. There was some good news in the 2009 annual report which showed that the scheme deficit had fallen from €3,382 million at the end of 2008 to €2,582 million by 2009.

However, the quarterly results showed that the deficit had increased slightly to €2.7 billion, largely because of the effect of falling interest rates (lower interest rates means higher scheme liabilities). Good but not great.

Unilever's results for the last five years are summarised in the table below:
Year

2009 2008 2007 2006 2005
Total Sales (millions)
€39,823 €40,523 €40,187 €39,642 €38,401
Diluted earnings per share
€1.17 €1.73 €1.31 €1.60 €1.25
Dividend per share
64.41p 60.74p 51.11p 47.66p 45.13p

2010 First Quarter -- Bouncing Back

It's no surprise that Unilever's share price has increased by more than a third since June, while the global economy has been emerging from the recession, from 1,450p to 1,980p.

Using an exchange rate of €1.16 per £1, the shares are on a fairly high historic P/E ratio of 19.6 but if the eps growth from the first quarter is repeated for the rest of the year, the prospective P/E ratio drops to about 15. That's not particularly expensive for a company of this quality which has increased its dividend by around 42% during the last five years.

Unilever's shares have had a good run over the past year and, whilst the global recovery is mostly priced into the shares and the pension scheme niggles remain, the shares are well worth holding onto.