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Before realignment: Unilever shares: Why Unilever still has great potential to catch up | message


by Sven Parplies, Euro on Sunday

M.argarine and soap, that was the beginning. 91 years ago the Dutch Margarine Union and the British Lever Brothers merged their businesses. The merger was never implemented consistently. To this day, the resulting Unilever is a divided group. With two headquarters, two classes of shares and many other special features that make the life of the consumer goods manufacturer both complicated and expensive.

Organizationally, Unilever is now supposed to become a completely normal company. On Monday, the shareholders of the Dutch subgroup voted for a merger. In October, the shareholders of the British Unilever will vote. If all goes well, the historic unification will take place in November. The shares of the Dutch NV would then be exchanged for papers of the British PLC.

Unilever originally planned a merger in the opposite direction with a head office in Rotterdam; the head office in London would have been dropped. British investors disagreed, also because they feared tax disadvantages. Exclusion of the share from the British FTSE 100 could also have resulted in price turbulence. There is also resistance to the new solution: The opposition in the Dutch parliament is calling for a special tax, which Unilever believes violates European law.

Global consumer giant

Unilever is one of the largest consumer goods manufacturers in the world. In its three corporate divisions – body care, food, cleaning agents – the group has more than 400 brands. Around 2.5 billion consumers use at least one Unilever product every day. Twelve brands – including Knorr, Dove, Rexona and Omo – have annual sales of more than one billion euros.

At this level, economies of scale make particularly high margins possible. However, growth in many of the categories in which Unilever is active is being held back by changing consumer habits. The investment bank JP Morgan sees Unilever as strong, especially in mature markets, and therefore expects the company’s growth weakness to continue. The reservations of investors can be seen in the valuation level of the share: Based on the profits expected for the next twelve months, Unilever is trading at a discount of almost 20 percent to rival Nestlé. Over the past ten years, this penalty averaged just seven percent.

Fresh energy in the course

The legal restructuring should bring momentum to the Unilever share. A headquarter would disappear in the future, which relieves the group treasury. Further changes could also be pending. The first step should be the sale of the tea shop with the Lipton brand. The area has a long tradition, but little growth potential in the western world. Even in the UK, the demand for tea is shrinking. Analysts estimate that Unilever could achieve up to five billion pounds. The exact price will depend on whether the group wants to keep parts of the business.

The proceeds could help the board of directors fund a large acquisition. With just one class of shares, Unilever could also use its own paper as a means of payment. According to analysts, another option would be to take the opposite approach, selling the food division, for example.

Safe dividends

There are already improvements in Unilever’s operations. The business figures for the middle of the year exceeded the analysts’ expectations. The rather defensive portfolio, which also includes hygiene products, helped in the corona crisis. Analysts see the adjusted net income slightly in 2020, around three percent below the previous year’s level.

The dividend shouldn’t be in jeopardy. Investors get a dividend yield of around three percent with Unilever – and have good reason to hope for a further increase in the dividend.

Potential: In comparison, the share is cheap. The Catch-up potential could be increased. Attractive dividend.


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Image Sources: JOHN THYS / AFP / Getty Images

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