Investment guide: Investing in Unilever

Unilever says that over two million people use its products: “With a product range that includes foods, homecare, and personal care brands such as Sunlight, Omo, Handy Andy, Robertsons, Knorr, Shield, Flora, Magnum, and many others, Unilever is the market leader in 14 of the 17 categories in which it operates in South Africa,” noted Unilever.

Unilever has a large presence in South Africa and Vaughn Webber, head of portfolio management for Absa Stockbrokers and Portfolio Management, feels it is a good addition to any portfolio. “Unilever is what you want to own. I may say right now it is slightly expensive, you are never going to get it cheap, I can guarantee you that, but you can get it closer to a fair value. This is the type of stock we call a long leash type stock where you can just buy this thing and you don’t really have to look at it, it will be fine. You will hold it forever and you never consider selling it, and it is just one of those high quality companies.”

How do Unilever’s stocks perform?

According to Webber, over the past year Unilever’s stocks did well with a 31% increase from the previous last year. Even the Brexit didn’t fluster the company much and when the British Exit was announced its share went up by 17%.

Unilever is a fast moving consumer goods company who, according to Webber, does not have major local competitors. While Clicks and Tigerbrands are similar, Unilever’s competitors are largely international with the likes of Procter & Gamble and Johnson & Johnson.

“Their [Unilever] most direct competitor is Procter & Gamble, but they are streaks ahead and have been for decades,” said Webber.

According to Webber, Unilever is better operationally than many of its competitors, which results in this premium rating. The company encompasses multiple brands that are recognisable to most South Africans, from Omo and Flora to Lipton and Magnum.

Furthermore, Webber noted that one factor that differentiates Unilever from the likes of Procter & Gamble and other companies is that Unilever is far more exposed in the emerging markets. About 60% of Unilever’s earnings come from emerging markets.

“The problem with developed markets is you are getting the competition coming in, not so much from the traditional guys like Procter & Gamble, but from private label goods, so your no name brand as we would know it here. In the developed market that is becoming quite a thing, and even in South Africa that is probably becoming quite a thing.

In the majority of emerging markets, as the consumer gets slightly wealthier he likes to buy brands that he recognises. Hellman’s mayonnaise for one or a Lipton tea for another, so where they [Unilever] position in terms of local markets in driving their growth, and probably will do for quite some time as those economies have a fair amount of road to run before they get anywhere close to developed status,” explained Webber.

Should you invest?

Unilever stocks are probably a little expensive at present, Webber noted, however, they are a secure investment. He pointed out that investors are looking for safe havens in which to invest, as well as for dividends that are secure and progressive.

“Unilever pays a 2.7% dividend yield in Pounds, which is obviously far superior to anything that you can get on cash, and it typically tries to increase its dividend on a yearly basis. They certainly have been able to do that for most of their history, this company goes back to the 1930s,” said Webber.

Something that people should be conscious of is the high valuations that these types of companies are receiving. We are in very uncertain times and yields across the globe are low, as a result, people are paying up for better dividend paying companies that have great defensive qualities, according to Webber.

“[You certainly will find people] saying companies like this are expensive right now, so that is the only thing I would caution investors, you may be paying a premium for the quality of the investment so you may want to wait until that comes closer to a fair value, or at least the sentiment in the market changes somewhat,” added Webber.

However, Webber noted that one risk to Unilever is its limited exposure to the online space. “The online space is growing very quickly and [Unilever] don’t really have a presence there, they are a traditional shelf space product producer and the online space is maybe where they will have to do a bit of catch up.”

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