Opinion piece on Unilever

Since Kraft-Heinz withdrew its offer, analysts have been calling for Unilever to ‘accelerate earnings’ and become ‘more aggressive’. Some are speculating about spin-offs and large acquisitions. Others suggest the company ought to gear up its balance sheet with debt in order to buy back its own shares.

Radical corporate restructuring or a bout of financial engineering might benefit short-term market participants, but we are convinced it will be detrimental to long-term shareholders.

Running any business involves striking a balance between the present and the future. Companies that ramp up profitability for a few years tend to suffer later as a result of that underinvestment. 

The management teams of most listed companies struggle with this, and much of the blame should be laid at the door of short-term oriented stock markets and impatient shareholders. Average holding periods are now measured in months, not years, and many investors want immediate results.

The cacophony of voices from ‘the market’ seeking to pressure Unilever’s management into action seems premised on the misplaced notion that the company has been underachieving. 

In reality, Unilever has been particularly successful at striking the right balance between present and future needs and ambitions. This has enabled the company to deliver not only for its shareholders but also on its broader social purpose.

Investors in Unilever’s London listed shares have been rewarded with a return of just under 13% a year over the past decade, vs. a little over 5% a year in the FTSE100. Sustained for ten years, this has meant a 230% return vs. 66% in the index. This is a company which has delivered handsomely for its shareholders.

Meanwhile, through its Sustainable Living Plan, Unilever is strengthening the agricultural practices of 600 thousand farmers in its supply chains. It has reduced the water intensity of its factories by nearly 40%. It is helping reduce child mortality by educating over 300 million consumers in developing countries to use soap.

No company is perfect. But these are not the achievements of a struggling organisation in need of a radical shake up.

Indeed Unilever’s commitment to sustainability seems a particularly popular target for critics keen to point out that the company is failing to allocate resources and time efficiently. This seems to betray a fundamental misunderstanding of the company’s history, value system and competitive advantages. 

Rather than an optional extra, the Sustainable Living Plan is a central tenet of Unilever’s identity, aspirations and long-term strategy.

The crucial point is that rather than a drain on resources or a distraction for management, sustainability leadership has helped to drive superior investment returns over time.

Constructive partnerships with smallholder farmers have helped to make the company’s supply chains more efficient and resilient. Environmental efficiency measures have taken cost out of the business and resulted in margins higher than they would otherwise be. Innovative and empowering distribution models have built brand loyalty in emerging markets and positioned the company to grow sales for decades to come in countries like Nigeria, India and Indonesia.

These very real investments in the business involve Unilever making a choice to defer some of today’s profits in order to realise greater gains tomorrow. In many cases they may take years – not a few quarters – to bear fruit. And they cannot be captured properly by spreadsheets and financial models. It should come as no surprise, then, that many investors do not see much value in such initiatives.

As a significant shareholder in Unilever on behalf of our clients, Stewart Investors will be encouraging Unilever’s allegedly ‘chastened’ management to resist short-term pressures to take corporate action in the wake of the Kraft-Heinz approach.

Instead we will be supporting them to continue doing what Unilever has been for 130 years: pioneering responsible capitalism and combining sustainability leadership with ample rewards for long-term, patient shareholders.
 

Jack Nelson

First published in the FTfm on 5 March 2017


Download a PDF of this article >

Important information

This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document.

This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document.

References to “we” or “us” are references to Stewart Investors. Stewart Investors is a trading name of First Sentier Investors (UK) Funds Limited, First Sentier Investors International IM Limited and First Sentier Investors (Ireland) Limited. First Sentier Investors entities referred to in this document are part of First Sentier Investors, a member of MUFG, a global financial group. First Sentier Investors includes a number of entities in different jurisdictions. MUFG and its subsidiaries do not guarantee the performance of any investment or entity referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk including loss of income and capital invested.

Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies.

Hong Kong and Singapore

In Hong Kong, this document is issued by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. In Singapore, this document is issued by First Sentier Investors (Singapore) whose company registration number is 196900420D. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. Stewart Investors is a business name of First Sentier Investors (Hong Kong) Limited. Stewart Investors (registration number 53310114W) is a business division of First Sentier Investors (Singapore).

Australia

In Australia, this document is issued by First Sentier Investors (Australia) IM Limited AFSL 289017 ABN 89 114 194 311 (FSI AIM). Stewart Investors is a trading name of FSI AIM.

United Kingdom

This document is not a financial promotion. In the United Kingdom, this document is issued by First Sentier Investors (UK) Funds Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 143359). Registered office: Finsbury Circus House, 15 Finsbury Circus, London, EC2M 7EB, number 2294743.

European Economic Area (“EEA”)

In the EEA, this document is issued by First Sentier Investors (Ireland) Limited which is authorised and regulated in Ireland by the Central Bank of Ireland (registered number C182306) in connection with the activity of receiving and transmitting orders. Registered office: 70 Sir John Rogerson’s Quay, Dublin 2, Ireland, number 629188.

Middle East

In certain jurisdictions the distribution of this material may be restricted. The recipient is required to inform themselves about any such restrictions and observe them. By having requested this document and by not deleting this email and attachment, you warrant and represent that you qualify under any applicable financial promotion rules that may be applicable to you to receive and consider this document, failing which you should return and delete this e-mail and all attachments pertaining thereto. In the Middle East, this material is communicated by First Sentier Investors (Singapore).

Kuwait

If in doubt, you are recommended to consult a party licensed by the Capital Markets Authority (“CMA”) pursuant to Law No. 7/2010 and the Executive Regulations to give you the appropriate advice. Neither this document nor any of the information contained herein is intended to and shall not lead to the conclusion of any contract whatsoever within Kuwait.

UAE - Dubai International Financial Centre (DIFC)

Within the DIFC this material is directed solely at Professional Clients as defined by the DFSA’s COB Rulebook.

UAE (ex-DIFC)

By having requested this document and / or by not deleting this email and attachment, you warrant and represent that you qualify under the exemptions contained in Article 2 of the Emirates Securities and Commodities Authority Board Resolution No 37 of 2012, as amended by decision No 13 of 2012 (the “Mutual Fund Regulations”). By receiving this material you acknowledge and confirm that you fall within one or more of the exemptions contained in Article 2 of the Mutual Fund Regulations.

United States of America

In the United States, this document is issued by First Sentier Investors International IM Limited, as SEC registered investment adviser. Stewart Investors is the trading name of First Sentier Investors International IM Limited. This material is solely for the attention of institutional, professional, qualified or sophisticated investors and distributors who qualify as qualified purchasers under the Investment Company Act of 1940 (hereafter the “1940 Act”), as accredited investors under Rule 501 of SEC Regulation D under the US Securities Act of 1933 (“1933 Act), and as qualified eligible persons as defined under CFTC Regulation 4.7. It is not to be distributed to the general public, private customers or retail investors.

Other jurisdictions

In other jurisdictions where this document may lawfully be issued, this document is issued by First Sentier Investors International IM Limited which is authorised and regulated in the UK by the Financial Conduct Authority (registration number 122512). Registered office 23 St. Andrew Square, Edinburgh, EH2 1BB number SC079063.