Is Unilever The Ultimate Retirement Share?

Published in Company Comment on 30 July 2012

Will shares in Unilever help you build a FTSE-beating retirement fund?

The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at Unilever (LSE: ULVR), one of the world's largest consumer goods companies, whose brands -- which include Cif, Dove, Hellmann's, Bertolli and Domestos -- we all use.

A Share To Hold Forever?

Unilever has a strong presence in emerging markets such as India. This has helped to fuel growth over the last decade. Let's take a look at how Unilever has performed against the FTSE 100 over the last 10 years:

Total Return20072008200920102011Trailing 10 yr avg.
Unilever35.8%-13.4%30.4%2.0%14.1%10.4%
FTSE 1007.4%-28.3%27.3%12.6%-2.2%7.2%

Source: Morningstar

(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)

Unilever has outperformed the FTSE 100 in four of the last five years, often by a large margin. This has contributed to its superior ten-year trailing average total return, which is a very healthy 10.4%.

What's The Score?

To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. So how does Unilever shape up?

ItemValue
Year founded1930*
Market cap£63.5bn
Net debt£8.4bn
Dividend Yield3.4%
5 year average financials
Operating margin14.8%
Interest cover12.9x
EPS growth15.7%
Dividend growth7.4%
Dividend cover2.1x

Source: Morningstar, Digital Look, Unilever

*Unilever was formed when several existing companies merged.

Here's how I've scored Unilever on each of these criteria:

CriteriaCommentScore
LongevityA long, successful history.5/5
Performance vs. FTSEFTSE-beating performance over the last decade.5/5
Financial strengthRelatively high gearing is mitigated by strong, stable profit margins and good interest cover.4/5
EPS growthAttractive EPS growth should sustain future dividend increases.3/5
Dividend growthUnilever loses a point for cutting its dividends this year. Its yield is also below the FTSE average, although the potential for further growth compensates for this to some extent.3/5

Total: 20/25

A score of 20/25 suggests that Unilever could be a good candidate for a retirement fund portfolio. Its huge range of consumer brands and emerging market footprint means that demand and growth opportunities for its products should remain strong for years to come, even in adverse economic conditions.

Expert selections

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Further investment opportunities:

> Roland owns shares in Unilever. The Motley Fool has recommended shares in Unilever.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

Excel35 30 Jul 2012 , 12:18pm

Where do you factor in the price of the stock, surely that is one of the most importnt metrics.

Gengulphus 30 Jul 2012 , 1:49pm

Unilever loses a point for cutting its dividends this year.

No, the company hasn't cut its dividends this year. It's raised them, from 22.5 euro cents per quarter to 24.3 euro cents per quarter.

The trouble is instead that the euro has dropped significantly on the foreign exchange markets, leading to a decline in the sterling value of those dividends. I.e. a better reason for that point lost would be "Unilever loses a point for declaring its dividends in euros, so that the investor's sterling income is subject to exchange rate changes."

Elsewhere in this series of articles, by the way, HSBC and Shell have a similar issue: they declare their dividends in dollars and so the investor's sterling income is subject to dollar:sterling exchange rate changes. It's not as obvious because there haven't been major changes in that exchange rate for quite a few years, and the last time that there were, it was a strengthening of the dollar in mid 2008, leading to unusually big increases in Shell's sterling dividend rather than reductions to it - see http://www-static.shell.com/static/investor/downloads/dividend/dividend_history_q1_2012.xls (HSBC would be similar apart from the fact that it really did cut its declared dividend shortly afterwards). But there is certainly the same sort of risk for those two companies as for Unilever, just in a different currency that isn't currently suffering from the euro,s problems.

Gengulphus

F958B 30 Jul 2012 , 3:37pm

I agree with Gengulphus regarding the divi.

Unilever raised the dividend in their reporting currency (Euro) but it just so happens that an increase in the Pound:Euro exchange rate made it less for Sterliing investors.

Maybe knock off half a point for currency risk on the dividend, but a whole point for a "small cut" is a little harsh.


I should add that I like Unilever, but would not buy at this high price and would consider reducing my holding if I held them.

mrburns2050 30 Jul 2012 , 9:09pm

I too hold Unilever would like to add to. but not at this price.

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