LONDON -- To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment, and my aim is to invest in companies that can beat the total return delivered by the wider market.
To put that aim into perspective, the FTSE 100 has provided investors with a total return of about 3% per annum since January 2008.
Quality and value
If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value. So this series aims to identify appealing FTSE 100 investment opportunities and today I'm looking at Unilever (ULVR +2.07%) (UL +2.18%), the consumer goods giant.
With the shares at 2770 pence, Unilever's market capitalization is 36.25 billion pounds. This table summarizes the firm's recent financial record:
|
2008 |
2009 |
2010 |
2011 |
2012 | |
|---|---|---|---|---|---|
|
Revenue (millions of euros) |
40,523 |
39,823 |
44,262 |
46,467 |
51,324 |
|
Net Cash From Operations (millions of euros) |
3,871 |
5,774 |
5,490 |
5,452 |
6,836 |
|
Adjusted Earnings per Share (cents) |
143 |
121 |
141 |
146 |
161 |
|
Dividend per Share (cents) |
77 |
41 |
81.9 |
93.1 |
97.2 |
I'd bet my last penny that you've heard of at least one Unilever brand. In Britain, the firm's products are stalwarts that many of us have used all our lives, like Lipton, Wall's, Knorr, Hellman's, Omo, and Ben & Jerry's. See! You've heard of them, right? Or, how about Pond's, Lux, Cif, Sunsilk, Sunlight, Flora, Bertolli, Domestos, Comfort, Radox, and Surf? All of them winners, and each one is big business for Unilever.
But Unilever's brand-fueled revenue isn't just big in Britain. Last year the firm sold about 51 billion euros of products to more than 190 countries, with about 55% coming from fast-growing emerging markets. The directors are targeting revenue of around 80 billion euros, and double-digit growth in emerging economies is a big contributor to that aim.
When a company like Unilever scores a hit, customers buy the products, use them up, and buy them again, over and over. That kind of consumer behavior leads to resilient and predictable cash flows -- a happy situation that helps support a steadily rising dividend and which leads many to label consumer brand businesses like Unilever as buy-and-forget investments, or companies to retire on.
Unilever's total-return potential
Let's examine five indicators to help judge the quality of the company's total-return potential:
- Dividend cover: Adjusted earnings covered the last dividend around 1.7 times. Score: 3/5
- Borrowings: Net gearing is about 49%, with net debt about 1.2 times earnings. Score: 4/5
- Growth: Revenue, earnings, and cash flow have all been growing steadily. Score: 5/5
- Price to earnings: A forward 17.7 looks ahead of growth and yield forecasts. Score: 2/5
- Outlook: Good recent trading and a positive outlook. Score: 5/5
Overall, I score Unilever 19 out of 25, which encourages me to believe the firm has potential to outpace the wider market's total return going forward.
Foolish summary
Under-control borrowings and steady growth in all desirable metrics seem to underpin the dividend and make sense of the low dividend cover. The outlook is good, and all of Unilever's qualities seem to be reflected in the full-looking valuation.
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