2014 has been a great year for investors in Unilever (LSE: ULVR) (NYSE: UL.US). Thats because the consumer products company has seen its share price rise by 9% since the turn of the year. This easily beats the FTSE 100s gain of 1% during the same time period. However, there could be more to come and Unilever could deliver a total return of 24%. Heres why.
Long-Term Potential
Clearly, most investors are well aware of the potential for consumer goods companies in emerging markets such as China and India. However, where Unilever may have more potential than many of its consumer goods rivals is in two areas.
The first is the nature of the products that Unilever sells. It focuses on consumer discretionary products as opposed to consumer staples. As the wealth of emerging market populations increases, demand for discretionary items could increase at a faster rate than demand for staples. Thats because discretionary items are more sensitive to income levels and wealth than staples are. Certainly, Unilever sells staples such as food items, but even they tend to be discretionary items (such as Magnums) rather than the basics needed to survive.
The second area where Unilever may have more potential than its rivals is brand loyalty. In the recent past, Unilever has focused significant time and money on emerging markets and has embraced them as the future of the company. Evidence of this can be seen in the fact that around 60% of Unilevers revenue comes from emerging markets. Although the marketing budget to achieve this has been vast, it should mean that Unilever enjoys a greater amount of brand loyalty than many of its rivals, which could translate into more sales.
Looking Ahead
Of course, Unilever is performing well at present. For instance, the companys bottom line is forecast to grow by 9% next year. Assuming Unilever stays on the same price to earnings (P/E) ratio as at present (20.8), that could lift the share price by 9%. Allied to this is a 3.3% yield that is set to grow to 3.6% next year, which means that even if Unilevers valuation remains constant, investors could enjoy a total return of 15.9%.
However, there could be scope for an increase in Unilevers current rating. Certainly, a P/E ratio of 20.8 seems rather high, but other consumer goods companies currently trade higher. For instance, SABMiller has a P/E ratio of 22.3. Were Unilever to trade on the same P/E as SABMiller it could mean that shares reach as much as 3160p, which would represent a gain of 17.1% over the current share price. Add to this the 3.3% yield this year and the 3.6% yield for next year and a total return of 24% seems very realistic (the 9% earnings growth rate has already been factored into the capital gain).
So, while shares in Unilever have performed well during 2014, there could be much more to come from them. They could even help you to retire seriously rich.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of Unilever. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
