Unilever (LON:ULVR) recently reported fourth quarter and 2019 full year results that were met with positivity from the market who initially sent shares higher.

The key positive takeaways were a 2.9% increase in underlying sales and a 2% increase in turnover.

Margins also improved with operating margin increasing 50bps to 19.1%.

Alongside the full year results, Unilever announced intentions to explore the sale of brands such as P&G Tips and other brands they felt no longer offered any contribution to their efforts to create a more sustainable and streamlined business.

“Despite growth being slow they have beat the market expectation and announced a review of the overall tea business. With performance lagging over the last 12 months the numbers are hardly dazzling but will give shareholders some comfort as the business looks to be turning a corner,” said John Woolfitt, Director of Trading at Atlantic Capital Markets.

Unilever valuation

Despite solid results for 2019, Unilever shares may be slightly overvalued when compared with its peers.

With Unilever shares trading at a forward PE 21, their shares do look expensive when compared to peer Reckitt Benckiser (LON:RB) which trades at 19x estimated earnings.

From a dividend perspective, ULVR and RB yield 2.8% and 2.7% respectively, so there is very little difference in the income investors will receive from the pair.

However, despite the higher valuation on a earnings basis, Unilever does far outperform Reckitt Benckiser when looking at the Return on Capital Employed.

Reckitt Benckiser has a ROCE of 10.3 while Unilever has a ROCE of 29, meaning Unilever is able to generate much more profit from the same amount of capital employed as Reckitts.

This higher level of efficiency may be why the market attaches a higher valuation to Unilever than Reckitt Benckiser, and shouldn’t necessarily be seen as a negative.

John Woolfitt of Atlantic Capital Markets sums this up:

“You would be hard-pressed to find a more solid blue-chip share to invest in, especially with the appealing dividend yield on offer at these prices.”


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