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The consumer staples sector is defensive. Nevertheless, in Western markets, sales are under pressure from weak economic growth, so firms must continue to invest heavily in brands to maintain market share. Emerging markets are experiencing rapid growth, as vast populations with increasing disposable wealth are attracted to branded goods.
As the world's third-largest consumer staples firms, Unilever has market power with suppliers and buyers and the scale to invest heavily in marketing. In emerging markets, it enjoys the advantage of having moved in early.
Emerging markets currently account for 57% of sales, and at around 10% p.a. are growing at twice the rate of total sales. A broad spread of earnings from Europe, the Americas, and Asia Pacific adds to Unilever's robustness.
Apart from a blip in 2009, sales have gone up year on year since 2005. Margins have remained remarkably steady, at around 14%-15%, over that period.
That's generated a return on capital of over 50% throughout that time.
The company retains the unwieldy dual-board structure of the 1930s Anglo-Dutch merger that created it. Executives were recruited internally until the arrival of the current chairman, in 2007, and current CEO, Paul Polman, in 2009.
He has done much to drive Unilever's emerging markets growth. His 8 million pounds' worth of shares puts many FTSE 100 CEOs to shame.
As a long-established company, Unilever has big pension obligations: a 4 billion pounds pension deficit is the net of 22 billion pounds of obligations and 18 billion pounds of assets. Moreover, its 16 billion pounds net assets are less than its 22 billion pounds of goodwill and intangible assets.
Together, those aspects might create some financial risk. But net gearing is a modest 47%, with interest covered 14 times, so Unilever has a safety net in its massive debt capacity.
Operating profit is largely converted to cash, easily covering the fixed costs of tax, interest, and dividends.
Unilever's shares are near their recent all-time high, and trading at a historically high rating, with a trailing P/E of 22. They have been chased up by investors' appetite for defensive income-yielding stocks as an alternative to holding bonds.
That makes them look expensive, but with a 3% prospective yield, and that emerging market growth, they look like a safe source of income suitable for any portfolio.
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