Why The Market Loves Unilever's 11.9% Sales Growth

Published in Company Comment on 26 April 2012

Early trading sees shares rise 4% on the news.

At 7am this morning, the Anglo-Dutch multinational consumer goods giant Unilever (LSE: ULVR) released its trading statement for the first quarter of 2012. The big news was that global sales were up by 11.9% to €12.1 billion while the quarterly dividend rose by 8% to 24.3 euro cents. However, when converted into sterling the dividend drops by ¾%, which reflects the euro's weakness during the past year.

While some of the rise in sales comes from last year's purchase of Alberto Culver, maker of the VO5 range of hair-care products, the underlying sales growth of 8.4% is excellent. This reflects Unilever's strength in overseas markets, which, to my mind, makes it a core long-term shareholding for investors who prefer lower-risk shares.

The market liked what it saw, and marked Unilever's shares up by over 4% in early trading.

Quarterly results? No thanks

Unilever used to announce a full set of results for its first and third quarters, but its current boss Paul Polman stopped doing this a couple of years ago. Polman argues that quarterly reporting is fuelling the culture of short-termism among investors and companies as they try to meet the market's expectations, which in turn damages longer-term performance.

While many shareholders prefer full quarterly reports, it isn't hard to get a good idea of how a company is performing from these trading statements. Although I prefer quarterly reports from companies that operate in more volatile sectors like oil, it doesn't bother me in the slightest for a very stable company like Unilever.

A very stable business

The nature of Unilever's businesses means that it is one of the select few shares that I'd be happy to lock away for 20 years or more. The main reason for this is that Unilever has an extremely strong portfolio of brands that it has built up over several generations, to the point where they are firmly embedded in the world's consumers' shopping baskets.

Furthermore, Unilever's size -- reflected in its sales of over €46.5 billion in 2011 -- means that it has massive economies of scale that makes it difficult for its smaller competitors to match its prices in the long run. This combination of strong brands and economies of scale forms what Warren Buffett calls a "moat" to protect your business.

Another point in Unilever's favour is that its products are highly resistant to the effects of technological change, which is the enemy of most businesses. After all, there's only so much you can do to deodorant, ice cream and shampoo, so the majority of innovation in the consumer goods sector tends to be in marketing, distribution and packaging.

A very stable sector

Pretty much everything mentioned in the previous section also applies to Unilever's main rival, the Cincinnati-based Procter & Gamble (NYSE: PG.US), as well other major consumer goods companies like Reckitt Benckiser (LSE: RB). When you're selling relatively low-cost branded items, many of which like washing powder are all but necessities, this means that you have an extremely stable and strong business model.

I'd be fairly confident in predicting that Unilever will still be battling Procter & Gamble for the top place in the global consumer goods market in 2030. There are few other companies or sectors of the stock market where I'd be happy to make such a statement, especially high technology where history has shown us that even the most dominant company can be just one competitor's new product from turning into an also-ran.

Valuations

Based on the share price of 2,160p as I type this, Unilever's prospective price-to-earnings (P/E) ratio for 2012 is 16.1 where it yields 3.6%. In contrast, Procter & Gamble at $66.89 is on a prospective P/E of 16.5 where it yields 2.9% net of withholding tax.

Unilever's shares usually trade at a slightly lower P/E than those of Procter & Gamble because the stock market values food companies less highly than non-food consumer goods.

So Unilever's food businesses such as Hellmann's Mayonnaise and Wall's Ice Cream aren't as prized at its non-food interests like Domestos, Lynx and Surf. In contrast, Procter & Gamble will soon be out of the food business, having recently agreed to sell Pringles to Kellogg's (NYSE: K.US).

The prospects

Unilever has plenty of scope for further expansion in the emerging market nations where it already gets over 50% of its sales, and it expects this to rise to 75% by 2020. It already has quite a head start in India thanks to its 52.1%-owned subsidiary Hindustan Unilever, which was established in 1956.

The importance of the developing world to Unilever can be seen in the trading statement, where sales rose by 11.9% compared to just 4.2% in the developed world. That's where Unilever's future lies, not in the highly indebted low-growth economies of Western Europe.

More information later on tomorrow

Procter & Gamble will announce its results for the third quarter of 2011-12 tomorrow, around midday London time, which will provide more information on the global consumer goods market.

Since P&G is an American company, it produces a full quarterly report -- not just the sales information like Unilever. I'm happy with both approaches and plan to hold onto my shares in both companies for a long time.

To learn more about dividend-paying shares, take a free 30-day trial to Motley Fool Share Advisor, where we recommend our top dividend share each month.

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> Tony owns shares in Procter & Gamble and Unilever.

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