Moneywise First 50 Fund manager Nick Train: 'Why Unilever is still exciting'

22 November 2017

Unilever, the global consumer goods giant should continue to excite its shareholders, according to Nick Train, manager of the Finsbury Growth & Income Trust, a member of the Moneywise First 50 Funds for beginners. This is despite Unilever’s share price dip in October.

Mr Train, who rarely buys new companies, preferring to buy and hold companies for many years, has long been keen on the investment case for Unilever, which makes consumer personal care brands such as Dove, Lux and Lynx, plus food and refreshment brands PG Tips, Marmite, Knorr and Magnum.

On 18 October, Unilever shares hit an all-time high of £45.48 but then suffered a 6% fall over the next 10 days. Today they are trading at £42.21.

Mr Train says that even after the October 6% drop, the shares remained up 29% over the year, so “perhaps there is little surprise that some investors should be looking for an excuse to take profits”.

He explains that Unilever’s Q3 trading statement was disappointing to many investors because it revealed was that its developed market business shrank by 2.3%, while its emerging market business grew at over 6% to get to a group growth rate of 2.6%.

“This divergence between developed and developing markets has been a feature for some time and must be tending, as it progresses, to tilt the group ever more towards ‘where all the people are’,” he says.

He cites Morgan Stanley research that shows Unilever has the joint second highest revenue exposure to emerging markets amongst its peers. ABI comes first, at 60%, with Unilever and Heineken (also in the trust’s portfolio) both at 58%. Amongst other Finsbury Growth and Income Trust’s holdings in the Morgan Stanley list, Diageo at 40% and Mondelez at 35% are advantageously positioned toward emerging markets too.

Mr Train says: “Without getting starry-eyed about it – because the last few years have proven again how volatile emerging economies can be – we’re sure that these exposures will be at least a mitigating factor for the companies as consumer brands work out how to readjust to the 21st century.”

He continues: “We look at the share price return on Hindustan Unilever (HUVR) – its 67% owned Indian subsidiary – as indicative of the excitement that investors may come again to feel about the shares of the parent. HUVR’s shares hit an all-time high in the first week of November 2017, up 56% so far in 2017 and properly performing for the first time since early 2015. Over the last decade HUVR’s shares have more than sextupled. This is both a nice reminder of the rewards for patient investing into emerging markets, but also of how important an asset it has become for the overall valuation of Unilever. “

The stake in the Indian subsidiary is now worth over £20bn, or around 16% of Unilever’s market capitalisation.

Mr Train concedes that “dogged work will be required” to pick up the pace of Unilever’s overall, global growth. “But we are encouraged by the dogged progress,” he says.

He points out that food, which represented 33% of group revenues in 2009, has now declined to 24% of the mix, “because packaged food products are probably most vulnerable”. Meanwhile, Unilever’s personal care sales have increased from 30% to 38% of revenues.

Mr Train also points out the benefits of the 3% income that investors in Unilever receive from their shareholdings. He says: “A near 3% dividend yield, with a dividend that has grown at nearly 10% a year over the last decade is no reason to argue that Unilever is cheap – we long ago realised that yield alone has no predictive value for total share returns. But I still find it reassuring.”

A report from Moneywise’s parent company Interactive Investor in October concluded: “Unilever is an excellent business with consistently high return on capital and barriers to entry as well as strong pricing power.”

Unilever is also a staple holding in the portfolios of other First 50 Fund managers. In July 2017, both Job Curtis, manager of the City of London investment trust, and Hugh Yarrow, co-manager of the Evenlode Income fund, named the consumer giant the single company they could least imagine selling.

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