Why the future is incredibly bright for an independent Unilever plc
Many investors groaned when Unilever (LSE: ULVR) turned down Kraft Heinzs $143bn bid but I believe the Anglo-Dutch giant was absolutely correct to maintain its independence. This is because the company has the geographic reach, staying power and potential for improvement that will allow it to continue rewarding shareholders for many years to come.
Global reach
Unilever now brings in more than half its sales from developing markets such as Brazil, China and South Africa. The long-term potential of these markets is obvious as increasingly wealthy consumers turn to name-brand food and consumer goods due to their safety, reliability and more premium connotations.
Best of all this growth isnt just wishful thinking but is already being seen on the ground. In the past year, sales from emerging markets rose 6.5% year-on-year on an underlying basis due to a 1.1% increase in volume and full 5.4% rise in pricing. This very good performance came even as various major developing markets suffered macroeconomic woes, which suggests to me that the companys long-term growth in these regions should continue to be relatively reliable.
The healthiest centenarian around
The firm as we know it has already been in business for more than 100 years and thanks to a world-class portfolio of brands there is no reason it cant last another century. From Dove to Ben and Jerrys and Knorr,Unilever owns some of the most coveted brand names around the world. This is why the company is able to provide steady revenue and profits even during recessions, because consumers are attached to these brands and will pay a premium for them.
By remaining independent it ensures that it will retain these assets unless there is a very, very good reason not to. Its far from certain that notoriously frugal 3G Capital, backers of Kraft Heinz, would resist the short-term rewards of, say, selling off Lipton if sales fell for a few quarters and the price tag were big enough. With a corporate culture that invests in its most valuable asset, its brands, over a long time horizon, Unilevers shareholders stand to benefit immensely.
Lessons to be learned
That said there are certain things Unilever can learn from its would-be-conqueror. 3Gs incredible focus on cost-cutting led to Krafts margins rising by more than 10 percentage points in just two years and they are now more than double Unilevers.
This, as well as the fact that the Anglo-Dutch companys 15.3% core operating margins also lag significantly behind competitor Reckitt Benckisers 28.1% underlying operating margins, should be a big wake-up call to management and shareholders.
The good news is that CEO Paul Polman is already emphasising a new focus on margin improvement, including adopting the radical zero base budgeting that 3G is famous for and shifting away from low margin food products to high margin consumer goods.
Sustainable improvement in margins without under-investing in its premium brands will be a tough task, but the success of Reckitt Benckiser shows it is possible. With margins already improving 50 basis points over the past year, sales in fast growing emerging markets rising and an unbeatable array of brand names, I believe the future is bright for an independent Unilever.
Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Reckitt Benckiser. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.