The consumer goods giant is making some interesting strategic moves
Thursday 30 Jul 2020 Author: Daniel Coatsworth

In a world where everyone seems to be obsessed with growth, it’s quite interesting when Unilever (ULVR) sees its share price jump 8.4% on reporting no growth at all (23 July).

The consumer goods giant managed to avoid the second quarter decline predicted by analysts and deliver a resilient performance. The market liked the outcome and bid up the shares. However, there’s more to the positive share price reaction than simply beating forecasts for three months’ trading.

Unilever is one of those seemingly boring companies that lacks the type of excitement provided by other parts of the market such as technology.

It sells essential products around the world and owns some of the best-known household brands among the hygiene, food and drink markets. That helps its make billions of euros in profit each year, albeit earnings progress is limited.

Failure to deliver decent growth has seen the share price mostly tread water since 2017. It has delivered 17.3% total return over the past three years, lagging the 25.2% achieved by the MSCI World index.

However, there are reasons to positive. What strikes me as interesting is the fresh thinking from Alan Jope who took over as chief executive just over 18 months ago. Despite having been with the company since 1985 and therefore at risk of being too accustomed to the old ways, Jope is eager to breathe some new life into the business.

This includes focusing on the best growth areas and being more relevant to young people, so they’ll not only buy today but also buy Unilever products for many years to come.

The recent decision to abandon its dual Anglo-Dutch corporate structure in favour of a single company based in London will give it more flexibility to make acquisitions and disposals easier and faster.

The latest trading update included a decision to spin off most of its tea business into a separate entity. This shows Jope is now being true to his word of taking action to reshape the company.

The tea business has been struggling to grow for some time and a large chunk of its portfolio is in black tea, which is the preference of older people. To engage more with younger people Unilever will need to have a greater presence in the fruit and herbal tea market.

Running a tea business on its own and not part of an effective consumer conglomerate should give management more freedom.

Equally, it shows that Unilever is finally taking action to unlock value in its business and address growth issues – and that’s a good reason to start buying the shares, alongside the fact that it continues to be a monster cash machine.

High cash generation is a key reason why many fund managers like the stock. Unilever has a strong ability to keep churning out dividends and any investor who can reinvest those payments into buying more shares should enjoy good compounding benefits over a longer period.

While the stock has lagged in recent years, looking over the past 10 years it has delivered 237% total return which is considerably more than the MSCI World index (165%). Definitely one to tuck away so it can quietly enhance your wealth for the future.

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