Renowned activist investor Nelson Peltz, founder of Trian Partners, has taken a 1.5% stake in Unilever (UL 0.19%). The position, worth about $1.6 billion, makes Trian one of the consumer packaged goods (CPG) giant's largest shareholders .
Unilever is a sprawling international conglomerate with extensive holdings throughout the consumer staples space. Brands in Unilever's portfolio range from Dove's personal care products like soaps and deodorants to Hellmann's Mayonnaise to Ben & Jerry's ice cream.
How might Peltz seek to help Unilever shift its approach? And what might this mean for investors? Let's find out.
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Peltz's choice of Unilever is particularly interesting because he enjoyed arguably his most successful activist campaign to date with Procter & Gamble (PG 0.68%), a company that is one of Unilever's closest peers and competitors. Peltz says that he sees Unilever as having "significant potential, through leveraging its portfolio of strong consumer brands and its geographical footprint" and that he wants to collaborate with the company. Can Peltz bring the magic touch he had at Procter & Gamble to Unilever?
Rough couple of years
Unilever would almost certainly benefit from some shakeup. It has tested investor patience of late with a failed bid for GlaxoSmithKline's (GSK -0.92%) healthcare business. Before that, a quest to focus on sustainability and to define the "purpose" of each of Unilever's 400 brands drew the ire of some investors, including top-10 holder Terry Smith of Fundsmith, who said that seeking to define the purpose of Hellman's mayonnaise means that management has "lost the plot."
But the dissatisfaction goes back further. Not only has Unilever underperformed the general market over the past five years, it has also drastically underperformed Procter & Gamble. Peltz began his campaign to bring changes to Procter & Gamble in 2017. While Procter & Gamble has posted a handsome 67% return over the past five years, Unilever has struggled to a loss of 16% over the same time frame.
This means that Procter & Gamble has beaten Unilever by 83% over the past five years. Nestlé (NSRGY 0.02%), another mega-cap international player in this space, has also drastically outperformed Unilever over the last five years with a return of 43%.
Furthermore, Procter & Gamble trades at a price-to-earnings multiple of 26, while Unilever trades at a more modest valuation of 17 times earnings.
Peltz playbook
Clearly, Procter & Gamble has earned this premium and multiple expansion thanks to its strong performance over the last few years, but the upside for Unilever is that there is an opportunity to try to close this gap. Among the changes Peltz pushed for at Procter & Gamble that helped to make it a successful investment were making each division responsible for its own profits and losses as well as reevaluating executive compensation and incentives .
Peltz wanted P&G to streamline into three business divisions, and invest in innovation and brands that would resonate more with younger consumers. While Peltz did not get all of the changes he originally wanted, P&G did cut down on red tape by downsizing from 10 divisions to six, becoming leaner, growing earnings, and maintaining market share .
This seems like a playbook that the sprawling Unilever could benefit from as well. Bernstein analyst Bruno Montyne speculates that proposed changes at Unilever will seek to go "back to basics" by "investing in innovation, fixing incentive schemes, and accelerating the pace of acquisitions and disposals." With over 400 brands in Unilever's portfolio, Peltz has plenty of options in this department.
Looking ahead
While Unilever has struggled over the past few years, there is still a lot to like here. And Peltz has a lot to work with, including the modest valuation, a 4.5% dividend yield, a portfolio filled with globally recognized brands, and a strong presence in emerging markets.
Any turnaround will be a long-term process. Given the company's size, pivoting will be akin to turning around an ocean liner, and it is not guaranteed that Peltz will be able to actuate the changes he wants to see.
Yet, this seems like a positive development, and Unilever is starting to look a lot more interesting from an investment perspective. If Peltz can have the same level of effectiveness that he did at Procter & Gamble over the past few years, Unilever investors will have reason to cheer.
