After a run of strong performance some investors think that bond proxies such as Unilever (ULVR) are due a correction – but fund manager Nick Train has been adding to his holding in the consumer goods giant.
Train is well known as being a big fan of Unilever, the firm behind popular brands such as Marmite and Dove Soap. His firm, Lindsell Train, has well over £1 billion of its clients’ money in the stock, which it first backed around 14 years ago.
He says: “We have never willingly sold a share over those 14 years.” That’s proven to be a good call so far – in that time, the share price of the stock has quadrupled. Over 25 years, it’s up almost sevenfold.
But that success has started to frighten value-conscious investors, who are concerned about the earnings multiples of such bond proxies.
But bullish Train revealed at an event in London this week that, far from being concerned, he has been buying more shares. The Anglo-Dutch firm now accounts for almost 10% of the net asset value of his Morningstar Bronze Rated Finsbury Growth & Income Trust (FGT).
“To us, Unilever is a truly exceptional company,” says Train, who is particularly impressed by its dividend history – Unilever has compounded its dividend at 8% per annum for an incredible 55 years.
“That is exceptional,” he adds. “Just in case anybody has any doubt whatsoever, that dividend growth has created incredible value for the owners of this company.”
Train says investors should not question the impact rising rates will have on the business or the valuation of its shares – which are trading on 20 times earnings today, up from 15 times five years ago.
He says: “The correct question of course is ‘can this company continue to deliver something like 8% per annum dividend growth into the foreseeable future?’
“If it can, from a starting dividend yield today still well in excess of UK inflation, it’s going to be a fantastic investment whatever happens to interest rates.”
Can Unilever Sustain its Dividend Rises?
For the last six or seven years, Train admits he has used a quote taken from Unilever’s investor relations website in part to justify his bullishness about the company. That quote used to claim that “on any given day, two billion people use Unilever products”. It has now been updated to 2.5 billion people.
“In other words, over the last six or seven years, the company’s switched on another 500 million customers – and there’s much more to go,” says Train.
This has been due in part to its impressive growth in emerging markets - over the past 25 years, sales in these countries have grown at 9% a year. Today, nearly 60% of its revenues are derived from emerging markets. It’s been an “unanticipated source of unexpected growth” for the business.
Within that, the jewel in the crown is Indian subsidiary Hindustan Unilever (500696), which grew revenues 16% in the year just gone. The share price, currently trading at an all-time high, has doubled in the past 17 months.
But it’s not all plain sailing – some investors are fearful about the effect of consumers’ waning brand loyalty. But Train insists it is only a concern for brands not in the top tier: “To us, it’s a comfort to note that 85% of Unilever’s revenues derive from brands that are either number one or number two in their global categories. That really is formidable.”
Yet, despite his allegiance to the firm, even Train has some questions about its future. He has now gone on the record as being one of the shareholders to have questioned the benefits for investors in the group’s plans to quit the UK stock market and solely list in Rotterdam.
He said: “We own Unilever plc and the question we’re asking ourselves is why would we, or anyone other holder of Unilever plc, vote later this year to lose our access to the plc line?
“The company itself has yet to produce its final definitive documentation explaining to us why it makes sense to give up our UK piece of paper. But I have to say right now we’re not necessarily persuaded that it’s in the interest of our clients.”
For now, however, he is maintaining his position and even adding to it. Last month, Unilever updated the market on its first-quarter performance. With that, it said its quarterly dividend would be 8% higher – a good start. “We continue to sit tight with Unilever,” says Train.
