As FE Trustnet recently reported, a fall in demand from the struggling emerging markets has led Unilever to revise down expectations for this quarter’s sales growth. The management team expected sales growth of 3 to 3.5 per cent in the third quarter, having seen a figure of 5 per cent in Q2 this year.
On the back of the news, shares in the FTSE 100-listed consumer goods company have fallen sharply this week, as data from FE Analytics shows.
Performance of stock year-to-date
Source: FE Analytics
However Train, who manages the five crown-rated CF Lindsell Train UK Equity fund, says it would be foolish to be spooked by short-term news and that he fully expects the stock – which makes up 8 per cent of his portfolio – to continue to deliver high returns in the long-run.
"I don’t know the future, but I would feel terrible if anyone who owns Unilever shares were to sell them because they had read a headline which suggested that the company was facing a catastrophe," Train said.
"That just isn’t true. There has been a profit warning as growth has slowed from 5 per cent to 3.5 per cent. Worse things have happened," he added.
The manager will be maintaining his high exposure to Unilever, as he told FE Trustnet last week.
Nevertheless, Train says he was not surprised by the fall in the share price as he says that attention to its defensive characteristics meant Unilever had previously risen excessively. However, he adds that the setback changes nothing in terms of his long-term view of the company.
"I can’t say I was surprised to hear about Unilever," he said.
"First quarter this year, shares had gone a bit euphoric and so they were prone to a correction. I could be wrong of course, but I really would be very surprised if this marks a fundamental termination of this story," he added.
With a market cap of more than £32bn, Unilever is one of the top-20 largest UK-listed businesses. Therefore it is not surprising to see that close to 100 funds in the IMA universe count it as a top-10 holding, with many more managers also having a more limited exposure.
Unilever’s most recognisable brands include food and beverages products such as Ben & Jerry’s, Pot Noodle, Marmite and Hellman’s, plus personal care products such as Lynx, Brylcreem, Dove, Surf and TRESemmé.
The company generates a huge percentage of its earnings from the emerging markets, with many investors buying Unilever to gain access to the growth in consumerism in the sector.
Despite concerns surrounding an economic slowdown in China and other parts of the developing world, Train says the long-term attraction of the stock is still very much intact.
"There are currently 2 billion people around the world that use Unilever products every day. That is mind-boggling," he said.
"Over time, they have set the realistic target that that number could be 3 or 4 billion. There are 7 billion people on this planet and that population is growing, so over the next 10 to 15 years I think that is a realistic ambition."
"Therefore, if we do see an increase from 2 to 3 billion people using Unilever products every day, then I am confident that the company’s profits and share price will go up a lot," he added.
Investors in Unilever have been well-rewarded in the past. Our data shows that investors who bought the stock in January 1995 would be sitting on returns of more than 410 per cent, which is far higher than the returns of the wider UK market.
Performance of stock vs index since Jan 1995
Source: FE Analytics
Train sees no reason why investors who buy Unilever today will not see a similar profit 20 years down the line.
"I was reminding myself that, of Unilever’s long-term performance."
"Over the last 20 years, the share price has gone from £6.40 to £23.16. I appreciate that is a very long time, but what that means is that it has nearly quadrupled in value. Also, that isn’t taking into account the dividends you would have received."
"To put that into context, the FTSE All Share has doubled over that time – which isn’t bad either. You have to be patient with these things and take the view that the emerging markets story is by no means over."
"This could be gross complacency on my part, but I can’t see any reason why the share price can’t go from £23 today to £85 in 10 years’ time. Whether I will still be running funds then, I’m not sure."
"However, the need for Unilever products is not going away," he added.
Because of that, the FE Alpha Manager says investors should be using the fall in price as a buying opportunity. When asked if he had upped his weighting this week, Train was unequivocal in his answer.
"Absolutely," he said.
"The other thing about Unilever is that on top of the share price growth, you are getting a serious dividend of over 4 per cent, which is 25 per cent higher than the market average and certainly much higher than most fixed income assets."
"That dividend has more than doubled over 10 years. If over the next 10 years that happens again, you would be earning an income return of 8 per cent."
"That is a fantastic proposition. But markets are markets and investors are investors. Do I think much has really changed to the Unilever story? No. This is just an opportunity, if anything," he added.
As well as managing the five crown-rated CF Lindsell Train UK Equity fund, Train also runs two closed-ended funds, the Finsbury Growth & Income Trust and the Lindsell Train Investment Trust.
He has run portfolios since the mid-1990s and our data shows that since the turn of the century Train has returned 214.05 per cent to his investors, beating his peer group composite by nearly 120 percentage points.
