This PowerPoint helps students to consider the concept of infinity.
Unilever
1. Project On: “Unilever”
Submitted To:
Muhammad Nasiruddin
Department of Finance and Accounting
North South University
Submitted By:
Nusrat Jabin Shanta
ID: 1511207030
Course: FIN440
Sec: 04
2. Corporate Governance Analysis
Unilever N.V. (NV) and Unilever PLC (PLC), together with their group companies have, since
the Unilever Group was formed in 1930, operated as nearly as practicable as a single economic
entity. This is achieved by special provisions in the Articles of Association of NV and PLC,
together with a series of agreements between NV and PLC which are together known as the
Foundation Agreements. These agreements enable Unilever to achieve unity of management,
operations, shareholders‟ rights, purpose and mission and can be found on our website. The
Equalization Agreement makes the economic position of the shareholders of NV and PLC, as far
as possible, the same as if they held shares in a single company and also regulates the mutual
rights of the shareholders of NV* and PLC. Under this agreement, NV and PLC must adopt the
same financial periods and accounting policies. The Deed of Mutual Covenants provides that NV
and PLC and their respective subsidiary companies shall co-operate in every way for the purpose
of maintaining a common operating policy. They shall exchange all relevant information about
their respective businesses – the intention being to create and maintain a common operating
platform for the Group throughout the world. The Deed also contains provisions for the
allocation of assets within the Unilever Group. Under the Agreement for Mutual Guarantees of
Borrowing between NV and PLC, each company will, if asked by the other, guarantee the
borrowings of the other and the other‟s subsidiaries. These arrangements are used, as a matter of
financial policy, for certain significant borrowings. They enable lenders to rely on our combined
financial strength. Each NV ordinary share represents the same underlying economic interest in
the Unilever Group as each PLC ordinary share. However, NV and PLC remain separate legal
entities with different shareholder constituencies and separate stock exchange listings.
Shareholders cannot convert or exchange the shares of one for the shares of the other. More
information on the exercise of voting rights can be found in NV‟s and PLC‟s Articles of
Association and in the Notices of Meetings for our NV and PLC AGMs, all of which can be
found on our website.
THE GOVERNANCE OF UNILEVER Further details of the roles and responsibilities of the
Chairman, Vice-Chairman, CEO and other corporate officers and how our Boards effectively
operate as one board, govern themselves and delegate their authorities are set out in the
document entitled „The Governance of Unilever‟, which can be found on our website. The
Governance of Unilever also describes the Foundation Agreements, Directors‟ appointment,
tenure, induction and training, Directors‟ ability to seek independent advice at Unilever‟s
expense and details about Board and Management Committees (including the Disclosure
Committee).
3. Roles and Responsibility:
A minimum of six face-to-face meetings are planned throughout the calendar year to consider,
for example, the half-year and full-year results announcements of the Group and the strategy of
the Group. Other ad hoc Board meetings are convened to discuss strategic, transactional and
governance matters that arise. Meetings of the Boards may be held either in London or in
Rotterdam or such other locations as the Boards think fit, with one or two off-site Board
meetings a year. The Chairman sets the Boards‟ agenda, ensures the Directors receive accurate,
timely and clear information, and promotes effective relationships and open communication
between the Executive and Non-Executive Directors. In 2016 the Boards met physically in
January, February, April, July, September and November and considered important corporate
events and actions, such as:
developing and approval of the overall strategy;
oversight of the performance of the business;
review of risks and internal risk management and control systems;
authorization of major transactions;
declaration of dividends;
convening of shareholders‟ meetings;
nominations for Board appointments, including the new Chairman;
review of the functioning of the Boards and their Committees; and
Review of corporate responsibility and sustainability, in particular the Unilever Sustainable
Living Plan.
Interaction with financial market and information about the firm:
Unilever is listed on NYSE and therefore it is pretty easy to obtain financial information about
them. Each of their activity, profit, loss and all other finance related things are shown and
calculated in NYSE.
Corporate Social Responsibility
SOCIETY WE ARE TAKING COLLECTIVE ACTION ACROSS OUR VALUE CHAIN TO
TACKLE THE MOST PRESSING ISSUES OF OUR TIME. IT IS THE RIGHT THING TO
DO, AND THE ONLY WAY TO GROW OUR BUSINESS SUSTAINABLY. Unilever creates
value for society in many ways, be they shareholders, consumers, society at large or around
169,000 employees who make a vital contribution to our Purpose of making sustainable living
4. commonplace. Our products are sold in more than 190 countries, generating income and
employment for retailers and distributors who bring our brands to consumers. We also create
value for suppliers – in 2016 we purchased €34 billion of goods and services. Taxes pay for the
public goods and services that benefit each and every one of us, and effective taxation is the
foundation of healthy societies. The taxes paid by businesses – and as a direct result of business
activity – make an important contribution. Total taxes borne by Unilever in 2016 amounted to €4
billion, of which €2.3 billion was corporation tax. To build confidence in the tax system, it is
especially important that business taxation is simple to understand, transparent, and applied
consistently, and that society trusts tax authorities to administer taxes fairly for all taxpayers.
Unilever fully complies with the tax laws in the countries where we operate, but where the tax
law is not clear or has not kept pace with the way modern business operates Unilever interprets
its tax obligations in a responsible way. At Unilever our Tax Principles provide this reference
point – further information is available on our website. We are proud of our contributions to
society, because they reflect the hard work and dedication of generations of Unilever people and
stakeholders. But we know that the successes we enjoy, and the contribution we make, depend in
turn on the success and resilience of the economies and societies we operate in. In these volatile
and uncertain times, those societies face many urgent challenges – social, political and
environmental. We know that we, and business as a whole, can and must do more to address
them. If we succeed, it will create the conditions for business to thrive. That is why we
introduced our Unilever Sustainable Living Plan (USLP) to leverage our scale, influence,
expertise in innovation and resources to directly address issues that matter to people – an
approach that strengthens our business so that it can grow sustainably.
6. Risk & Return
Risk management is integral to Unilever‟s strategy and to the achievement of Unilever‟s long-
term goals. Our success as an organization depends on our ability to identify and exploit the
opportunities generated by our business and the markets we are in. In doing this we take an
embedded approach to risk management which puts risk and opportunity assessment at the core
of the leadership team agenda, which is where we believe it should be. Unilever adopts a risk
profile that is aligned to our Vision to accelerate growth in the business while reducing our
environmental footprint and increasing our positive social impact. Our appetite for risk is driven
by the following:
Our growth should be consistent, competitive, profitable and responsible.
Our behaviors must be in line with our Code of Business Principles and Code Policies.
we strive to continuously improve our operational efficiency and effectiveness.
We aim to maintain a strong single A credit rating on a long-term basis. Our approach to risk
management is designed to provide reasonable, but not absolute, assurance that our assets
are safeguarded, the risks facing the business are being assessed and mitigated and all
information that may be required to be disclosed is reported to Unilever‟s senior
management including, where appropriate, the Chief Executive Officer and Chief Financial
Officer.
As of 11-04-2017 Unilever has a Beta of 1.31 and market risk of 116 according to powerful tool
called Risk Grades TM
, created by the Risk Metrics Group. Risk Grades is calibrated to be more
intuitive and easier to use than standard deviation or beta. And because Risk Grades is a
standardized measure of volatility, it allows comparison of investment risk across all classes and
regions. Risk Grades captures all the components of market risk: equity, interest rate, currency,
and commodity risk. From this tool it can be said that Unilever has average risk in the market.
Unilever‟s marker risk is coming from different sources. But for the sake of calculations we are
assuming it comes from industry. Risk profile is constantly changing if the industry is facing
severe currency problem, high/low sales and other effects. However risk profiling requires both
risk capacity and risk tolerance to be properly assessed so that they can be compared. So,
depending on these two factors risk profiling can change.
I consider Unilever PLC not too risky. Unilever PLC owns Efficiency Ratio (i.e. Sharpe Ratio)
of 0.007 which indicates Unilever PLC had 0.007% of return per unit of risk over the last 1
7. month. The philosophy towards measuring volatility of a stock is to use all available market data
together with company specific technical indicators that cannot be diversified away. I have found
twenty-one technical indicators for Unilever PLC which you can use to evaluate future volatility
of the company. Please validate Unilever PLC Semi Deviation of 0.6129, Coefficient Of
Variation of 972.4 and Risk Adjusted Performance of 0.047 to confirm if risk estimate we
provide are consistent with the expected return of 0.0062%.
The output start index for this execution was zero with a total number of output elements of
seventeen. Unilever PLC Average Price is the average of the sum of open, high, low and close
daily prices of a bar. It can be used to smooth an indicator that normally takes just the closing
price as input. View also all equity analysis or get more info about average price transform
indicator.
8. Allowing for the 30-days total investment horizon, the coefficient of variation of Unilever PLC is
14201.15. The daily returns are distributed with a variance of 0.76 and standard deviation of 0.87. The
mean deviation of Unilever PLC is currently at 0.66. For similar time horizon, the selected benchmark
(DOW) has volatility of 0.4.
α Alpha over NYSE
= 0.01
β Beta against NYSE
= 0.96
σ Overall volatility
= 0.87
Ir Information ratio
= 0.02
9. Equity Risk Premium of Unilever
Country Revenues ERP Weight Weighted ERP
United States of America 17105.36 5.00% 44.69% 2.23%
United Kingdom 13162.43 5.60% 34.39% 1.93%
Russia 4870.68 7.40% 12.72% 0.94%
Turkey 1056 8.30% 2.76% 0.23%
Ukraine 989 16.25% 2.58% 0.42%
Belarus 1095 14.75% 2.86% 0.42%
Total 38278.47 100.00% 6.17%
Region Revenues ERP Weight Weighted ERP
Africa 6315 10.04% 43.75% 4.3921%
Asia 4157 6.51% 28.80% 1.8734%
Australia & New Zealand 5.00% 0.00% 0.0000%
Caribbean 0 12.65% 0.07% 0.0088%
Central and South America 8.62% 0.00% 0.0000%
Eastern Europe & Russia 7.96% 0.00% 0.0000%
Middle East 3953 6.14% 27.38% 1.6825%
North America 0 5.00% 0.00% 0.0000%
Western Europe 0 6.29% 0.00% 0.0000%
Global 0 6.35% 0.00% 0.0000%
Total 14435 100.00% 7.9567%
(d) Refers to Asia, Africa, Middle East, Turkey, Russia, Ukraine and Belarus.
The total ERP for Unilever is too high because Asia/AMET/RUB has the more country risk premium based
on the revenue.
Unlevered Beta of Unilever
Business Revenues EV/Sales Estimated Value Unlevered Beta
Retail (Softlines) $ 10,010.00 1.2682 $ 12,694.97 1.3262
Healthcare Information $ 12,500.00 4.7354 $ 59,191.96 1.0755
Household Products $ 10,003.00 2.6469 $ 26,477.28 0.8623
Food Processing $ 20,200.00 1.3988 $ 28,254.77 0.7606
Company $ 52,713.00 $ 126,618.98 0.9858
10. Average unlevered beta of Unilever = 0.9858
Market beta of Unilever= 0.9858[1+ (1-.2610)(17,238.4/17,251.05)]
= 0.9858[1+ (.739) (1.00)]
= 1.09
Cost of Equity
Country Revenue (In
Millions)
Levered Beta Risk
Free
Rate
Risk Premium Cost of Equity
Total $52,713 1.09 2.33% 7.95 10.97%
Cost of Debt
Country Risk Free Rate Spread
Rating-
A1(S&P)
Pre Tax
Cost of
Debt
After Tax Cost of Debt
(Marginal Tax rates
40.00%)
Unilever 2.33% 0.85 3.18 2.19%
Businesses Comparable
firm
Sample
size
Median
beta
Median
D/E
Median
tax rate
Company
Unlevered
beta
Median
cash/firm
value
Weight
Personal Care U.S Based 121 0.94 32.18% 14.31% 0.79 10.07% 0.3833
Foods U.S Based 87 0.75 26.84% 14.66% 0.65 2.57% 0.2373
Home Care U.S Based 129 0.80 21.20% 9.05% 0.71 2.97% 0.1897
Refreshment U.S Based
companies
36 0.91 24.51% 5.87% 0.79 4.84% 0.1897
11. Cost of Capital:
Equity Debt
Preferred
Stock Capital
Market Value $115,332.80 $19,586.15 $0.00 $ 134,918.95
Weight in Cost of Capital 85.48% 14.52% 0.00% 100.00%
Cost of Component 10.97% 2.19% 0.00% 9.70%
If Book Value weights, the cost of capital
Unilever‟s preferred dividend per share as of December 2016 was Zero million dollars. So, Cost
of capital = Cost of Equity * (Equity/ Debt + Equity) + After Tax Cost of Debt * (Debt/Debt +
Equity)
Cost of Capital= 10.97% * (17,251.05/17,251.05M+17,238.4M) + 2.19%
*(17,238.4M/17,251.05M+17,238.4M)
=10.97%*0.5003+ 2.19%* 0.4997
= 6.58%
12. Investment Return
CASH AND CASH EQUIVALENTS Cash and cash equivalents in the balance sheet include
deposits, investments in money market funds and highly liquid investments. To be classified as
cash and cash equivalents, an asset must:
be readily convertible into cash;
have an insignificant risk of changes in value; and
have a maturity period of three months or less at acquisition.
Cash and cash equivalents in the cash flow statement also include bank overdrafts and are
recorded at amortized cost.
OTHER FINANCIAL ASSETS Other financial assets are first recognized on the trade date. At
that point, they are classified as:
held-to-maturity investments;
Loans and receivables;
available-for-sale financial assets; or
financial assets at fair value through profit or loss
(I) HELD-TO-MATURITY INVESTMENTS: These are assets with set cash flows and
fixed maturities which Unilever intends to hold to maturity. They are held at cost plus
interest using the effective interest method, less any impairment.
(II) LOANS AND RECEIVABLES: These are assets with an established payment profile
and which are not listed on a recognized stock exchange. They are initially recognized at
fair value, which is usually the original invoice amount plus any directly related
transaction costs. Afterwards, loans and receivables are carried at amortized cost, less any
impairment.
(III) AVAILABLE-FOR-SALE FINANCIAL ASSETS: Any financial assets not classified
as either loans or receivables or financial assets at fair value through profit or loss or
held-to-maturity investments are designated as available-for-sale. They are initially
recognized at fair value, usually the original invoice amount plus any directly related
transaction costs. Afterwards, they are measured at fair value with changes being
recognized in equity. When the investment is sold or impaired, the accumulated gains and
losses are moved from equity to the income statement. Interest and dividends from these
assets are recognized in the income statement.
(IV) FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS: These
are derivatives and assets that are held for trading. Related transaction costs are expensed
as incurred. Unless they form part of a hedging relationship, these assets are held at fair
value, with changes being recognized in the income statement.
13. After-tax ROC= EBIT (1-tax rate)/ (BV of debt + BV of Equity-Cash) previous year
=8494M (1-26.1%)/ (17898+17251-4199.36)M
= 8494(1-26.1%)/(30950)
=16.42%
Return Spread = After-tax ROC - Cost of Capital
= 16.42%-9.70%
=6.72%
EVA = Return Spread * ((BV of debt + BV of Equity-Cash) previous year)
=6.72*(17898+17251.05-4199.36)
=207984M
Unilever
Net Income 5,547
Total Equity 17251.05
EBIT 8494
Tax Rate(1-.261) 0.739
Book Value Per Share 5.98
Total No. of Shares 152,446
Total Book Value 911,627.08
Total Assets 56,429
Current Liabilities 20,556
ROC 16.42%
ROE 16.93%
14. Capital Structure Choices
Debt-to-equity ratio: A solvency ratio calculated as total debt divided by total shareholders'
equity. Unilever's debt-to-equity ratio deteriorated significantly from 2014 to 2016.
Debt-to-capital ratio: A solvency ratio calculated as total debt divided by total debt plus
shareholders' equity. Unilever's debt-to-capital ratio improved from 2014 to 2015 but then
deteriorated significantly from 2015 to 2016.
Interest coverage ratio: A solvency ratio calculated as EBIT divided by interest payments.
Unilever's interest coverage ratio deteriorated from 2014 to 2016 not reaching 2014 level.
Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Debt to equity 1.00 0.90 0.93
Debt to capital 0.4998 0.47 0.48
Interest coverage 13.73 13.71 16.56
Market Equity Capitalization
From December 2014 to December 2015, market capitalization improved from $122,447.14
million to $130,432.83 million. While From 2015 to 2016, the market capitalization declined
from $130,432.83 million to $117,351 million, while the number of shares outstanding was
2883.32.
Enterprise Value
Enterprise value is another way to look at capital structure. It is calculated by adding debt and
other forms of long-term debt not included in total debt, such as pension liabilities, to market
capitalization, and then cash is subtracted. Enterprise value is popular among those looking for a
total cost of ownership on a particular company. From 2015 to 2016, Unilever's enterprise value
declined from $142,924.11 million to $131050.49 million, along with market capitalization.
There is a large difference between Ford's enterprise value and its market capitalization, which
15. was $13,699.49 million as of end of year 2016. The difference is primarily debt, though the
company also has a large cash position.
Debt Capitalization
Debt capitalization did not remain flat over the same time frame. In December 2014, total debt
was $15,686.84 million, consisting of $6826.17 million in short-term debt, $8860.67 million in
long-term debt and lease obligation. In December 2015, the total debt increased to $15,209.15
million, consisting of $4773.42 million in short-term debt, $10,435.73 million in long term-term
debt and lease obligation. Unilever has one of the most diverse portfolios of debt, which is not
surprising given the company‟s recent past. From out calculation debt for 2016 is $17,238.4
Million.
Advantages of using debt for Unilever:
1. Cost reduction: Compared to equity, debt requires lower financing cost. Thus, Unilever
often mixes debt into their capital structure to bring down the average financing cost.
Using debt, companies are contractually liable to make periodic interest payments and
return debt principal at maturity. As a result, debt holders bear less risk, compared to
equity holders, who often have no recourse for their investments if Unilever fails. In the
event of Unilever liquidation, debt holders also have the senior claiming rights to
company assets, which give them another layer of protection for their investments.
2. Profit Retention: Using debt, companies need to pay only the amount of interest out of
their profits. Using equity, on the other hand, the more profits a company makes, the
more it has to share with equity investors. To take advantage of such a debt-financing
feature, Unilever often use debt to finance stable business operations in which they can
more easily make ongoing interest payments and, meanwhile, retain the rest of the profits
to themselves.
3. Financial Leverage: When Unilever use debt to provide addition capital for their
business operations, equity owners get to keep any extra profits generated by the debt
capital, after any interest payments. Given the same amount of equity investments, equity
16. investors have a higher return on equity because of the additional profits provided by the
debt capital. As long as using debt doesn‟t threaten the financial soundness of a company
in times of difficulties, equity owners welcome certain debt uses to help enhance their
investment returns.
4. Tax Savings: Tax rules permit interest payments as expense deductions against revenues
to arrive at taxable income. The lower the taxable income, the less tax Unilever pays. On
the other hand, dividends paid to equity holders are not tax-deductible and must come
from after-tax income. Therefore, tax savings help further reduce Unilever‟s debt
financing cost, which is an advantage that equity financing lacks.
5. Debt Adds Discipline to Management: Forcing Unilever to borrow money can be an
antidote to the satisfaction. The managers now have to ensure that the investments they
make will earn at least enough return to cover the interest expenses. The cost of not doing
so is bankruptcy and the loss of such a job.
Disadvantages of using debt:
1. Paying Back The Debt: Business debt financing can be a risky option if your business
isn‟t completely on very good condition or large enough. If Unilever is forced into
bankruptcy due to a failed business, their lenders will have claim to repayment before any
equity investors in their business.
2. High Interest Rate: Unilever has to pay high interest rate and therefore it profit is cut
down by a significant margin.
3. Effect on Credit Rating: Effect can be negative if Unilever lends a very high amount.
This translates into higher interest rate risk and more risk on the part of the lenders.
4. Cash Flow Difficulties: Depending on the sales, lending big could create substantial
difficulties to handle cash flow and payment structure.
17. Optimal Capital Structure
Cost of Capital:
Equity Debt
Preferred
Stock Capital
Market Value $115,332.80 $19,586.15 $0.00
$
134,918.95
Weight in Cost of Capital 85.48% 14.52% 0.00% 100.00%
Cost of Component 10.97% 2.19% 0.00% 9.70%
The question then becomes a simple one. As the debt ratio change, how much does the cost of
capital change?
Dec 31, 2016
EBIT(1-T) 8494 (1-26.1)
+Depreciation, Amortization, Depletion 1,544
-Change in Working Capital (53.80)
-Capital Expenditure (2,147)
Free cash flow to the firm (FCFF) 5,142 Million
18. Selected Financial Data Dec 31,
2016
Dec 31,
2015
Dec 31,
2014
Dec 31,
2013
Dec 31,
2012
Interest expense 599.16 596.95 594.33 684.93 511.81
Net income attributable 5,547 5,259 6,376 6632 5,732
Effective income tax rate (EITR) 26.10% 26.90% 27.87% 26.02% 25.96%
Interest expense on debt, after tax 442.77 436.37 428.69 506.71 378.94
Cash dividends declared 3600 3404 3196 2,574 2190
Interest expense (after tax) and
dividends
4042.77 3840.37 3624.69 3080.71 2,568.94
EBIT(1 – EITR) 5,764.93 5,493.47 7,228.87 7,617.91 6,726.76
Long-term debt payable within
one year
5564.35 4773.42 6826.17 5,493.15 3,485.56
long-term debt payable after one
year
11,674.05 10435.73 8860.67 10,261.64 9,927.87
Equity attributable to Unilever 17,251.05 16,818.08 16832.31 19,649.32 20199.48
Total capital 34,489.45 32,027.23 32,519.15 35,404.11 33,612.91
Retention rate (RR) 0.30 0.31 0.37 0.72 0.72
Return on invested capital (ROIC) 16.42% 19.06% 20.48% 22.87% 21.94%
Unilever has $5142 million in cash flow, expected to growth rate at 2.33% per year.
Debt
Ratio Beta
Cost of
Equity
Bond
Rating
Interest rate
on debt Tax Rate
Cost of Debt
(after-tax) WACC
Enterprise
Value
0% 1.0270 10.49% Aaa/AAA 2.93% 40.00% 1.76% 10.49% $121,631
10% 1.0955 11.04% Aaa/AAA 2.93% 40.00% 1.76% 10.11% $127,630
20% 1.1811 11.72% Aaa/AAA 2.93% 40.00% 1.76% 9.73% $134,252
30% 1.2911 12.59% A2/A 3.43% 40.00% 2.06% 9.43% $139,804
40% 1.4378 13.76% A3/A- 3.58% 40.00% 2.15% 9.12% $146,352
50% 1.6432 15.39% B3/B- 7.83% 40.00% 4.70% 10.05% $128,708
60% 1.9513 17.84% Caa/CCC 8.83% 40.00% 5.30% 10.32% $124,353
70% 2.8382 24.89% C2/C 12.83% 24.42% 9.70% 14.26% $83,271
80% 4.2573 36.18% C2/C 12.83% 21.37% 10.09% 15.31% $76,533
90% 8.5147 70.02% C2/C 12.83% 18.99% 10.39% 16.36% $70,803
19. Debt Ratio $ Debt
Interest
Expense
Interest
Coverage
Ratio Bond Rating
Pre-tax cost of
debt Tax rate
After-tax cost
of debt
0% $0 $0 ∞ Aaa/AAA 2.93% 40.00% 1.76%
10% $13,461 $394 18.71 Aaa/AAA 2.93% 40.00% 1.76%
20% $26,921 $789 9.36 Aaa/AAA 2.93% 40.00% 1.76%
30% $40,382 $1,385 5.33 A2/A 3.43% 40.00% 2.06%
40% $53,843 $1,928 3.83 A3/A- 3.58% 40.00% 2.15%
50% $67,303 $5,270 1.40 B3/B- 7.83% 40.00% 4.70%
60% $80,764 $7,131 1.03 Caa/CCC 8.83% 40.00% 5.30%
70% $94,225 $12,089 0.61 C2/C 12.83% 24.42% 9.70%
80% $107,686 $13,816 0.53 C2/C 12.83% 21.37% 10.09%
90% $121,146 $15,543 0.47 C2/C 12.83% 18.99% 10.39%
Firm value increases when the debt ratio is at 40%.
Recommended Debt:
Unilever already has a debt to capital ratio of 49.98% and it is already above its optimal debt
ratio. Therefore I would suggest Unilever to slash down its debt ratio and match optimal debt
ratio to increase the value of Unilever. However as I do not like keeping a large sum of debt in
the balance sheet, I would like to slash down debt ratio below 40% only if unilever increase its
cost of equity part.
Debt Ratio Difference with Market:
Currently Unilever‟s debt to capital ratio is 49.98% means it has higher debt to capital ratio
compare to the industry it is operating in. From this info it is easy to say that Unilever has too
much debt. But it is not as straightforward as that. Unilever's total long-term debt, used in the
debt-to-equity ratio includes which essentially acts as a bank, borrowing money from other
institutions that it uses to make loans to consumers and dealerships.
20. However as the debt ratio of unilever is higher than the optimal debt ratio of 40%, I think that the
debt ratio of Unilever is a bit higher than usual. So it is better if they reduce their debt.
Mechanics of Moving to Optimal
Unilever‟s optimal debt ratio is at 40%. However, they have a debt ratio at 49.98%. It is
significantly more. My take is that they should do it right now. If unilever continues to go like
that, then at one moment they will go bankrupt. Despite all that I think at first they should
continue using retained earnings to pay off less favorable debt and to invest in future projects.
They should take on new projects using equity. Doing so will also bring more cash and income
to the firm which they can use to pay back debt.
Dividend Policy
The chart below shows Unilever‟s dividend track record from its 2006 stock split and capital
restructuring onwards. If you‟d like to see the company‟s performance before 2006 you can
check out the dividend history on the Unilever website or the Euro Dividend All-Stars list.
21. Unilever‟s ability to maintain and grow its dividend for at least 36 consecutive years is truly
impressive, but no surprise given that industry peers like P&G and Nestlé are able to do the
same. Nevertheless, Unilever is one of the few European companies that are able to boast such
an incredible feat.
Over the past five years distributions to shareholders increased by 7.73% annually on average, a
very solid number for a rather defensive and conservative investment. The 10-year DGR comes
in only a tad lower at 6.40%, mainly because of a dividend growth dip following the financial
and economic crisis. EPS growth roughly followed a similar path.
The payout ratio for Unilever shares currently stands at about 70%, which is rather high but
certainly manageable for a stable business like Unilever. Besides, it‟s not much higher than the
payout ratio of its industry peers. On top of that, Unilever hardly carries any long-term debt on
its balance sheet with a debt-to-equity ratio of 0.75 and an interest coverage ratio of 15.
Valuation
I expect unilever to have a stable growth. They are in better situation than their rivals. However
there will be a time when room for growth will be very limited. In that case I expect unilever to
keep growing until there is not enough demand.
5years cash flow estimation
2016 2017 2018 2019 2020
Levered FCF $5,144 $5188 $5,229 $5,269 $5,307
Source
Analyst
x5
Analyst
x4
Analyst
x2
Extrapolated Extrapolated
Present Value
Discounted @
9.81%
$4,724 $4336 $3,979 $3,649 $3,346
Present value of next 5 years cash flows: $20,034
22. After calculating the present value of cash flows in the intial 5-year period we need to calculate
the Terminal Value, which accounts for all the future cash flows beyond the 1st stage. The
Perpetuity Method (Gordon Formula) is used to calculate Terminal Value at an annual growth
rate equal to the 10 year government bond rate of (2.77%).
Terminal Value
Terminal Value = FCF2020 × (1 + g) ÷ (Discount Rate – g)
Terminal Value = $5465 × (1 + 2.77%) ÷ (9.70% – 2.77%)
Terminal value based on the Perpetuity Method where growth (g) = 2.77%: $81044
Equity Value
Equity Value (Total value) = Present value of next 5 years cash flows + terminal value = $20034
+ $81,044= $101,078
The last step is to then divide the equity value by the number of shares outstanding. If the stock
is a depositary receipt (represents a specified number of shares in a foreign corporation) then we
use the equivalent number.
Value = Total value / Shares Outstanding ($101,078 / 2883.32)
Value per share: $26.59
Finally if we compare the intrinsic value of $19.13 to the current share price of $26.59 means it
is slightly overvalued and not available at a discount at this time.
23. Operating income growth in 10 years = (10,873)
The paths I would choose:
1. I would try to operate Unilever at optimal debt ratio.
2. Reduce market specific risks.
Invest on R&D so that Unilever always stays a curve ahead of competitors.
Current 1 2 3 4 5 6 7 8 9 10
Expected Growth Rate 2.78% 2.78% 2.78% 2.78% 2.78% 2.69% 2.60% 2.51% 2.42% 2.33%
Cumulated Growth 102.78% 105.64% 108.57% 111.59% 114.69% 117.78% 120.84% 123.87% 126.87% 129.82%
Reinvestment Rate 16.93% 16.93% 16.93% 16.93% 16.93% 18.20% 19.48% 20.75% 22.03% 23.30%
EBIT $8,375 $8,608 $8,847 $9,093 $9,346 $9,606 $9,864 $10,121 $10,375 $10,626 $10,873
Tax rate (for cash flow) 26.10% 27.49% 28.88% 30.27% 31.66% 33.05% 34.44% 35.83% 37.22% 38.61% 40.00%
EBIT * (1 - tax rate) $6,189 $6,242 $6,292 $6,341 $6,387 $6,431 $6,467 $6,494 $6,513 $6,523 $6,524
- (CapEx-Depreciation) $994 $1,056 $1,065 $1,073 $1,081 $1,088 $1,177 $1,265 $1,351 $1,436 $1,520
-Chg. Working Capital $54 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0
Free Cashflow to Firm $5,142 $5,185 $5,227 $5,267 $5,306 $5,342 $5,290 $5,229 $5,162 $5,086 $5,004
Cost of Capital 9.06% 9.06% 9.06% 9.06% 9.06% 8.50% 7.94% 7.38% 6.82% 6.27%
Cumulated Cost of Capital 1.0906 1.1893 1.2970 1.4145 1.5426 1.6737 1.8066 1.9400 2.0724 2.2022
Present Value $4,755 $4,395 $4,061 $3,751 $3,463 $3,160 $2,895 $2,661 $2,454 $2,272
