Back in 2017 multi-national consumer goods company Unilever was approached by Buffett and 3G capital with a $143 billion dollar takeover bid. The $50 bid back then (£40.50) is not far off of today’s share price, which creates a buying opportunity for investors today.
In brief: on 10th February 2017, 3G capital sent a representative to Unilever headquarters to make an audacious offer whereby Kraft Heinz would take over the Anglo-Dutch Unilever group for $143 billion in cash and stock. The CEO at the time, Paul Polman, was taken aback. He did not expect the offer and he felt that it grossly undervalued the future prospects of the group.
The offer was immediately rejected. From 3G capital and Warren Buffett’s point of view there was a perfect opportunity, to acquire Unilever while the pound sterling had declined by 17%, and the US dollar was strong. What they had underestimated was Polman’s dedication to long-term growth and prosperity, and the determination to keep Unilever on a track that wouldn’t sacrifice long-term returns for short-term profit gains.
In general at Frugal Investors we believe a passive, long term investing strategy is the best way forwards. The Global Dividend Aristocrats portfolio is one effective way to invest for the long term. Unilever is one of thousands of holdings within that portfolio. To view this in context then: we do from time to time highlight individual stock holdings that may be held alongside a balanced portfolio.
The Investment Case
Buffett and 3G capital had a strategy based around making an initial offer, then slowly grinding it upwards until they could make a deal. What we know is that, at the very least, they valued the business at $50 (£40.50).
Today Unilever stock can be purchased in the UK for £46.28, or $59.26 in the US. That is approximately 14% above the original offer price in sterling terms that was put forward by Buffett and 3G capital.
Unilever has several highly sought after and internationally recognized brands. Step outside of the United States, where companies like Kraft Heinz have a significant footprint, and you’ll realise that Unilever has unparalleled access to the international market that is difficult to compete with. That translates to 43.3% of revenue in the growth engine regions of Asia Pac and the Middle East; and significant revenue streams in Europe.
Those billion euro brands include Ben & Jerry’s iced cream, Axe, Dove, Wall’s, Lipton, Magnum and Hellmann’s.
As you can see revenue and net income took a hit in 2019 due to the slowdown in Asia, particularly India where a combination of bad weather, politics and sluggish growth have impacted sales. There has been share price weakness recently over concerns around the coronavirus and the fact that 2020 revenue and profit will be “weighted to the second half,” suggesting there could be further slippage this year.
However, the picture improves dramatically in 2021 and 2022 as the business recovers and returns to its long term sales target of 3-5% revenue growth.
The forecast earnings per share figures for 2020-2022 have 17.8%, 8.7% and 6.6% pencilled in for each of the next three years.
That in itself is not overly scintillating but remember you get paid a 3.05% dividend yield for owning the business. Unilever will look to continue to increase the dividend at over 6% per year, which in turn helps the share price grind higher.
Unilever has a 43% dividend pay-out ratio, which is good, and it has a history of paying and growing its dividend. The value of the dividend was €0.75 in 2009 and increased to €1.52 last year. That works out to a healthy compound annual growth rate of 8.2% per year.
Measuring fair value involves a bit of math and attention to detail, regarding what the current and future cash flows of the business are and are likely to be. Doing a ‘discounted cash flow’ analysis is common practice amongst investment banks when they evaluate any business.
An excellent example of this can be found here, and it concludes that Unilever’s fair value price is £52.56 per share. That means that today’s price is a 13.6% discount to fair market value.
What constitutes a fair ‘margin of safety’ when considering whether an investment is worth putting your money into? It depends on a number of factors.
At a high level, in general, you want to look for 20-40% margin of safety (for a screaming bargain) and look more circumspect at margins between 0-15%. For larger blue chip companies with great prospects it is difficult to find anything trading at 20-40% below fair market value.
Whatever individual shares you choose to purchase, we recommend that all but the most senior investors stick with a passive approach to investing for the majority of their cash investments. With the remaining 10% or so, try your hand at identifying the best businesses with the strongest growth prospects and hold those businesses for many decades.
With a strong company like Unilever you are in good stead to out-perform the market over the long term. The business has excellent brands, a determined moat against competition, strong fundamental performance figures, and it has been valued by one of the best investors in history at a level similar to today’s share price.
At the same time don’t rush in: consider buying a smaller position and, without spending too much on trading fees, building on that position as and when the share price dips.
Disclosure: I/we own shares in Unilever as a long term holding. Investors are encouraged to do their own research thoroughly before making an investment. This article does not constitute investing advice.