Earlier this year, after Unilever PLC (NYSE:UL), Unilever N.V. (NYSE:UN) snubbed a merger offer from Kraft Heinz Co (NASDAQ:KHC), Unilever management promised to embark on a “strategic review” of its business in order to “enhance shareholder value”. It is apparent from the actions of its management team that it was paying lip service to the promise, and it could not care less about what is in the best interest of UL stock owners.
Not only that, but management’s promise to make emerging markets a core focus of its ongoing strategy is also a bunch of baloney.
When a company like Unilever is under fire and must engage in a strategic review, it is tantamount to being referendum on company management. Any company worth its salt should see this as a signal to drastically alter its approach. It should result in sale of non-core businesses, but it should also result in creating an entirely new vision for the company going forward.
If you need an example of where it went right, look at McDonald’s Corporation (NYSE:MCD).
Instead, UN management insulted shareholders with pointless cosmetic changes that do nothing to enhance shareholder value. Here’s what it did and why it’s all pointless.
4 Reasons UL Stock Is Not as Impressive as You Think
1) Sell the spreads business. UN sold its Flora and Stork brands for 6 billion Euros. Why? “Packaged food growth has been slowing for some time, and while the margarine business remains very profitable, consumers are moving away from the spread in search of healthier alternatives.” It’s not a totally unreasonable move, but if it’s profitable and people are moving away from it, then re-engineer the products so they are healthier.
2) Increase dividend. Boosting the UL stock dividend by 12%, or about $0.17 per share. Who cares? Fobbing this off as being some grand plan to enhance growth? Is that a joke? It’s a bribe, and a lousy one at that, since a 3% yield is paltry in this market.
3) Share repurchase. This is an outright insult. Share buybacks in a market that is 25% to 30% overvalued is criminal. Repurchasing UN stock, which trades at 25x net income on virtually no organic growth is not enhancing value — it’s throwing good money after bad. Why not buy gold at $2,500 an ounce while management is at it?
4) Combining Divisions. Hold on for this one! Unilever is going to combine its food and refreshment division to “unlock future growth and faster margin progression”. In the fine print, it says whatever positive impacts it may have “excludes restructuring of 20% by 2020”. This begs the question — why wasn’t this done sooner? Unilever seems to say it had to wait for emerging markets growth to ramp up, but combining divisions to reduce expenses is a no-brainer. And that’s another point — it’ll reduce expenses, not lead to organic growth.
That’s it, folks. That’s the big “strategic review” outcome. Nothing about re-envisioning the business in a period where snack foods, ice creams, and beverages are being increasingly removed from people’s diets all around the world. The entire globe is getting healthy, and you can see that in the lackluster sales of the legacy soda makers, and stalled growth in the most famous snack food and cereal companies here in the U.S.
Over at ETX Capital, an analyst said exactly what I feel: “It smacks a little of short-termism but we have to see whether the offloading of spreads and higher gearing pays off as it looks to grow its business in emerging markets, where it generates 57 per cent of sales and where future growth needs to come from.”
Bottom Line on Unilever
As for emerging markets, Unilever management said this in 2013, after the company announced it would increase its stake in its India unit to 75%: “The long-term growth potential of emerging markets is central to our strategy … This represents another step in Unilever’s strategy to invest in emerging markets and increase its exposure to countries that offer great long-term, structural growth potential, through population growth and rising per capita income.”
It’s all very rah-rah. Except UL stock has been a terrible corporate citizen in the emerging market region. Besides dumping mercury waste in India, and taking years to settle the case, Unilever has had to deal with child labor accusations and treating workers poorly. Not only that, the risks of owning international co-ventures as a shareholder can hit investors at any time, without warning.
In this case, shareholders got hit with a near-tripling of royalty fees that Hindustan Unilever must pay its parent. You know, it’s all to keep pace with all this torrent growth! Don’t worry, sending that money off to a company that UL stock owners don’t own won’t hurt us a bit!
Everything here is designed to keep CEO Paul Polman in his job, with his fat paycheck and stock options, and doing nothing to truly enhance shareholder value. It’s all short-term smokescreens that can be renewed and extended on and on, instead of making the right decisions. Not taking advantage of local partners and using child labor isn’t a bad idea, either.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. He also is the Manager of the Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.