Unilever Financial Analysis

a) Introduction to the company and its position in the industry

Unilever is an Anglo-Dutch multinational company that was established due to the merger of Margarine Unie and Lever Brothers in 1930. However, Margarine Company was involved in production of margarine and lever brothers had a soap manufacturing unit. Unilever operates its business in different countries around the world. The Unilever UK is listed in London Stock Exchange. In the initial stages of merger, different agreements of having common directors were signed by both companies with equally distributing capital and values of dividends. Now, Euro is accepted by Unilever as a new currency for the purpose of reporting.

Unilever offers different products for its consumers in food, home care, personal care and beverages. Unilever is considered to be one of the largest food companies in London. The annual turnover of Unilever is approximately €40 billion and it employs more than 200,000 employees in order to provide effective and efficient products and services to its consumers. There are around 400 food brands in which Unilever is dealing and it is providing its food products in more than 100 countries(Unilever, 2016).

Image result for SwoT analysis of unileverSource: (Li and Luo, 2016)

According to Capece et al (2013) in UK a considerable growth and development is experienced by food industry however due to downturn in global economy the growth is slowed in last few years. As a result of high competition within the UK food industry, Unilever has to face a lot of challenges. In accordance with companies registered in London Stock Exchange two major competitors of Unilever PLC are Cranswick PLC and Dairy Crest Group PLC. Unilever is performing better than its competitors with respect to its market share, EPS and DPS. Unilever has focused highly on adopting latest technology for the purpose of bringing innovation in the business. In opposite to Unilever, Cranswick PLC and Dairy Crest Group PLC have not focused highly on advanced technology, due to this reason they are not successful in introducing unique products in market. The focus of Unilever is on various kinds of food products but with respect to market share in dairy products, Dairy Crest Group PLC is leader in UK market. The market share of Dairy Crest Group PLC is more than Unilever, as Dairy Crest Group PLC has focused typically on dairy and milk products. In Dairy Crest, a strong performing segment is spreads. This food segment of Dairy Crest puts a lot of challenge to Unilever regarding profit margin. In 2010, 19.5% profit margin of Dairy Crest was due to the segment of spreads. As, Unilever has many other competitive edges over Dairy Crest and Cranswick, so it makes these two companies difficult for improving their revenues and profit margin (Zentes and Morschett, 2013).

b): Plot of DPS and EPS of the company and two main competitors properly labeled













Unilever PLC
























Unilever PLC






















(c) Relative performance of share and its two main competitors properly labelled


Part 2: Critical reviews of main theories of dividend policy

Dividend policy theories are used for explaining the rationale and arguments related to payments of dividend by companies. Companies are usually torn in between payments of dividends or reinvestment of their profits earned on business. Even in case of firms which are regular in paying dividends do not have a constant formula to determine the dividend payout ratio. Dividends are payments given after some specific time period to shareholders which are actually the returns given to shareholders for making investment in stock of firm.The investors take investment decision in a company on the basis of dividends and capital appreciation given by that company to its shareholders.

2.1. The Modigliani and Miller Theorem

In 1961, Modigliani and Miller published a paper related to dividend policy. In that paper, a new view related to the importance of dividend to determine future value of a company is elaborated. They did a discussion on dividend policy with respect to an assumption that investors must be indifferent to payment or non-payment of dividend by the firm. After that, in 1958 they claimed that there is irrelevance of capital structure of a company as a determinant factor of company’s future prospects (Brusov et al, 2015).

According to M&M theory, an investor takes capital gains and dividends in the form of returns. There is a positive relationship between earnings of firm and its value in the eyes of investors. In case of known investment policy of a firm, there will be a need of only this information for making an investment decision. Further, it is explained by this theory that on the basis of cash’ requirements of investors, own cash inflows are created by investors from their own stocks regardless of whether they get dividends on their stocks or not (Titman, 2002).

2.1.1. Assumptions of the Modigliani and Miller model

According to Villamil (2008) Modigliani and Miller identified some conditions that must be followed by a company in order to ensure validity of their hypothesis;

  • There is perfectness in capital markets that means investors behave logically, there is free availability of information for investors, non-existence of transaction and floatation cost and share price is not influenced by any investor.
  • There is either non-existence of taxes or there is no difference in applicable tax rates to both dividends as well as capital gains.
  • There is a fixed investment policy of the firm.
  • No uncertainty about future prospects of firm exists and therefore all investors are capable of forecasting future prices and the company uses one discount rate for all securities for each time period.

2.1.2. Critique

The two critical assumptions of MM theory are unjustifiable in the practical world. It is assumed by the theory that there is an absence of transaction cost and taxes, but practically it is impossible to have an economy with having absence of these two elements (Sargent, 2009).

2.1.3. Comparison with empirical research

According to MM theory the investors do not take interest in dividends and none of investors is influenced by share price of company. This assumption of MM theory is in contrast with current scenario of Unilever PLC. The investors these days are highly interested in dividends per share and share price. In Unilever, the companyprovides quarterly dividend to its shareholders while imposing tax. So, MM theory is criticised in a way that in Unilever, there is an applicability of taxes and transactions costs in both dividends and capital gains.

2.2. The residual theory

Another dividend theory is residual theory, according to which dividends paid by companies are residual, after retaining cash for projects with positive NPV. This theory claims that it is inappropriate to use payment of dividend to determine the future market value of company (Huet, 1994). According to Miller et al (2009) according to the residual theory, desirable investment projects should not be foregone by companies for paying dividends. On the basis of this theory, it is assumed that investors do not care whether dividends are paid by the firm or not, but they are concerned about future cash flows of company that might result in capital appreciation of stocks and in future higher payouts of dividends

2.2.1. Critique

There is no empirical support for residual theory, but it is only an explanation of logic that is too evident for decision makers in corporate world. Companies generally fulfill financial requirements of their development strategies before paying dividends to their shareholders and hence the theory states something that is obvious (Smith, 2009).

2.2.2. Comparison with empirical research

In current situation of Unilever, there is partial implication of the residual theory. Unilever does not focus only on desirable investment projects but side by side it gives specific dividend payout ratio to its investors. It has been seen from the empirical research conducted on Unilever for last five years that dividend per share of Unilever has been increased from 2011 to 2014, but only in 2015 the value of dividend per share was decreased (Ouma, 2012). The reason behind this reduction is investment done by Unilever in a project, but it does not mean that Unilever has started ignoring its shareholders or shareholders have started ignoring dividends, but the reason is to get some earnings in the form of future cash flows. The management of Unilever took this step for generating some future cash flows. There is a high reputation of Unilever in London, due to its high dividend per share as compared to its competitors such as Cranswick and Dairy Crest (Al-Malkawi et al, 2010). 

2.3. The Walter Model

In 1963, Walter postulated a model according to which it is stated that dividend policy of a company is relevant in specifying the value of a company. It is assumed by this model that when shareholders get their dividend then they reinvest that dividend backin to the firm for getting higher returns.From the side of company, cost of dividend is considered to be an opportunity cost of company (ke), since this could have been used by company as capital if not paid out in the form of dividends. There is another situation for firms in accordance with Walter Model in which dividends are not paid out by firms and those dividends are invested in other projects for earning returns. In such case, the rate of return r must be equal to ke. It depicts that such rate of return is equal to shareholders’ earnings in case of payment of dividends. Thus, returns from investment would be more if value of r is greater than opportunity cost ke (Hamed Al-Yahyaee et al, 2010).

Avadhani (2010) stated that it is also assumed according to Walter’s model that in case if value of r is less than ke, then profits of firm must be distributed to shareholders in the form of dividends. However, if value of r is greater than ke, then better returns can be reaped through opportunities of investment, thus instead of paying dividends, retained earnings of firm must be invested in profitable projects. It is very important to identify the relationship between r and ke for determining the dividend policy of a firm. It helps the management of firm in deciding whether to have zero payout or maximum payout.

In a nutshell, if D = the dividend payout ratio,

If r>ke, the firm should have zero payout and make investments. (D = 0)

If r<ke, the firm should have 100% payouts and no investment of retained earnings. (D=E)

If r=ke, the firm is indifferent between dividends and investments.

Mathematical representation of Walter’s Model:


P = Market price of the share

D = Dividend per share

r = Rate of return on the firm’s investments

ke = Cost of equity

E = Earnings per share

The market value of share includes the sum of;

The current value of dividends

The current value of returns on investment done through retained earnings

So, the share’s market value depends on expected dividends and capital gains in accordance with Walter.

2.3.1. Assumptions of Walter’s model

  • A company can only make investment with the help of retained earnings, there is no involvement of external finance.
  • There is a constant value of cost of capital and return on investment.
  • The life of a firm runs to perpetuity.

The decision of firm regarding dividend payment relies on whether there are enough opportunities for investing the retain earnings (Martins and Novaes, 2012).

2.3.2. Critique of the Bird-in-Hand and Walter’s Hypotheses

Although a simple framework for explaining the relationship between share price and dividend policy, but there are some unrealistic assumptions behind this model;

  • In real world, it is not true that firms only rely on retained earnings for financing.
  • There is seldom existence of constant values of r and ke, in case of more investment by firm, the level of risk is also increased.

2.3.3. Comparison with empirical research

In Unilever, the management has to some extent applied Walter’s model. Sometimes, Unilever makes investment in profit earning projects in order to gain positive future cash flows. Most of shareholders of Unilever reinvest the dividend within the company in order to have high rate of returns (Al-Yahyaee et al, 2011).

2.4. The Tax-Preference Theory

According to the perception of M&M regarding capital market, there is no presence of any tax. Miller and Modigliani perceived that there is no such difference in the treatment of tax in between capital acquirements and dividends. However, there is presence of taxes in the real world and it has major effect over policy of dividend and over value of the organization. Generally, there is a difference in tax treatment in between capital gains and dividends, and due to the fact that large numbers of investors are interested in the return of after-tax, the effect of taxes can influence the dividend’s demands.

The hypothesis of tax-preference recommends that payout of low dividend decreases the price of capital and enhances the stock cost. Through extension, payout ratios of low dividend make contribution in the increment of value of organisation (Barclay et al, 2009). This argument is dependent over the perception that taxes are given to dividends at higher rates as compared to the capital gains. Along with it, taxes are given to dividends immediately, while taxes over capital gains seem to be deferred till the selling of stock. These tax benefits of capital gains over dividends predispose the investors, who own tax treatments over capital gain for preferring the organisations that retain the earnings as compared to paying them out like dividends. They like to pay premium for low-pay-out organisation.

The other significant thing to be considered is that in the estate condition; where heir is enrolled to share after benefactor’s death, none of the taxes of capital gains are due from heir in these types of conditions (Dahlquist et al, 2014).

Part 3

Unilever N.V and PLC are differentiated from each other with respect to different legal identities but they work as a single entity. Unilever has high earning per share in contrast to Cranswick and Dairy Crest Group. In 2011 the value of Unilever’s EPS was 131.05 and it dropped down to 124.11 in 2012. With continuous change in each year, the value of EPS was 132.42 in 2015 that is much higher than Cranswick (92.1) and Dairy Crest Group (27.8) (Al-Malkawi et al, 2010).

According to Mirza and Azfa (2010), as compared to Cranswick and Dairy Crest, there is fair dividend policy of Unilever. However, practically growth was delivered by the group after inflation. The initial income offered by Unilever (3.1%, at a share price of 2,862 pence) is considered to be the highest in market but for Unilever dividend is looked as more secure and sustainable approach. The management of company ensures payment of high dividend to its shareholders in order to get maximum future investment from them.

After the Paul Polman became the chief executive in January 2009, Unilever stated a new policy of dividend to be run through 2010 onwards. The policy of Unilever seeks to pay developing, sustainable and attractive dividends to shareholders. The organisation stated that it can move through paying final dividend and an interim to four quarterly dividends, announced through quarterly outcomes. Along with it, the alignment of payments can be done in better way by the change with the cash flow development of the business. A developing dividend has been delivered by Unilever, for sterling and euro investors. However, exchange rates have worked quite well in opposed to the latter ones in the current two years (Crane et al, 2016).

There are still some risks, mainly related to the preference of brand. The customer products organisations suffer from the competition for customer loyalty and shelf space through direct competitors, Nestle and Procter & Gamble. Along with it, deterioration of economic conditions in current markets can cause issues down the line.

At its recent price €37.30 Unilever yields 3.19% when taking into account the distribution of year 2015 of €1.191. Unlike other organisations of Europe, quarterly dividend is paid by Unilever, which recently stands at €0.302 and can increment in the second quarter of year 2016 (John et al, 2016).

The chart depicts the dividend track of Unilever which has been recorded from capital restricting and stock split in the year 2006.

The capability of Unilever for maintaining and growing its dividend for 36 consecutive years is really impressive, but side by side it has to face a lot of competition from other food producers operating in London. Over previous year, there was increment in the distribution of shareholders by 7.73% yearly on average, a good number for conservative and defensive investment. The 10-year DGR emerged in a tad which is lower at 6.40% mainly due to the dividend development dip that follows the economic and financial crisis. Same path was followed by EPS development (Saez and Stantcheva, 2016). The payout ratio of Unilever recently is around 70%, which is high but is manageable for businesses such as Unilever. Along with it, it is not higher as compared to the payout ratio of peers of industry. Above of all, Unilever holds long-term debt over balance sheet with interest coverage ratio of 15 and 0.75m debt-to-equity ratio. For global investors, it is significant to notice that Unilever developed a merger in between the British Lever Brothers and Dutch Margarine Unie in year 1930, which has resulted into two major controlling holding which performs operation like economic utility: Unilever plc and Unilever N.V. The organisation is now listed on both of the London Stock Exchange (ULVR) and Dutch Euronext stock exchange (UNA) (Abdulkadir et al, 2016).

According to Haring et al (2016) this difference has been pointed out due to the fact that most of the investors prefer purchasing B-class shares over A-class shares. The shares of UNA are subjected to decrease the Dutch with 15% holding tax. On contrary to this, the dividends of UK are not provided with taxes for foreign investors, though both of the shares represent dividends in Euros. Unilever is trying to fight the decreasing costs through hard words over brands. However, supermarkets are now growing their own food items and spreads, which are then weighing on the sales of Unilever. An exit from the business is of no surprise in the next year.

The best-performing area of Unilever was refreshments, which involves brands of ice creams like Ben & Jerry’s and Magnum. The total revenue of Unilever increased 10pc to €53.3bn (£41bn), in 12 months to December end. The best performance emerged through rising markets; where sales enhanced 7.1pc, up from development of 5.7 pc in the similar period the last year.The rating of shares is done at higher rates, trading over 21 times earnings through forecasts. However, it reflects the track record and defensive qualities of delivering development. Unilever do have an excellent record of payments of dividends, and enhanced the quarterly payout through 5pc, to 30 cents (23p), and paid on 9th March. The shares have been good during the sell-off, rest of the flat as broader FTSE 100 fallen 6pc. Still it is believed that this is long term share. Customer items giant pays dividends and keeps good track record of developing cash. The organisation’s strong initiate to the year, linked with its perception that positive conditions of markets look good to continue (Ilaboya et al, 2016).

Rising market development is cornerstone of long term future of Unilever and it also depicted improvement signs. The organisation develops 60pc of total sales through markets like Africa, Latin America and India. Development of sales across Unilever’s East European, Middle Eastern, African and Asian business enhanced to €5.5bn by 3.3pc in first quarter, more than 2.1 pc development of last year in fourth quarter. Still there is a problem of deflation of cost across markets, where Europe is creating more of the issues. Unilever stated that in Europe, 1.6 pc products were sold in the first quarter, but at costs 1.9pc less than the similar period. Unilever owns a very good track record of dividend payment, and it enhanced the payout to 21.8p by 6pc, and paid on 3rd June. The entire year dividend is assumed to enhance to 125 cents (89.7p) from 11pc, giving a prospective yield of around 3.1pc. The rating of share is done highly, trading on forecast earnings. However, it is even possible that item costs in Europe can initiate to recover following the decision of central bank of Europe for launching €1.1 trillion quantitative program in the month of January (Geiler and Renneboog, 2016). Decreasing prices of commodity needs to push profits faster as compared to the sales in second half. Unilever is quality organisation and investors needs to be happy on holding this organisation. Following the fair winds assumed in the next year, long term suggestion is maintained.

Conclusion and Recommendations

Dividend policy needs to target the future prospects and earning capacity of the organisation; stock pricing and trading are not dependent over fundamentals but are based on announcement and speculation of particular technique. The stability of dividend policy needs to be maintained. Organisations need to prepare dividend policy determining all of the factors involving the desire of shareholder to policy of dividend. The food organisations of UK should target the appropriate disclosures on the policy decisions and state affairs for avoiding the manipulation. The dividends affect the organisational value as it influences the financing mix and development of the organisation (Bremberger et al, 2016). It has signalling influence over shareholders, therefore Unilever is re-suggested to follow explicit and stable dividend policy which commensurate the earning capacity and development of the organisation. The majority of managers of Unilever stated that less number of investors have impact over market share cost, and most of the investors need to sell and buy common stock dependent over market cost trends without passing through financial statements and balance sheets. Unilever is suggested to develop or support institutional arrangement for investors. Shareholders expect good governance in every step of life. When the management of organisation is distinct and separate from the providers of capital of organisation, managers get responsible for using the assets in efficient way. It ensures that, it is significant for the prosperity of organisation as to its feature to attract low-cost, stable and long term investment. This is true for if the organisation is state-owned, family-controlled, privately held, and publicly held. It is only when managers of organisation keeps the whole organisation and are committed to depend mainly on the capital. Managers are free to implement such assets for non-productive usage. The important concern of the government is to ensure the resources through which the managers of the organisation are held responsible for the usage of assets (Jiraporn et al, 2016).

Owners of equity and shareholders are greater in number, and shareholder manages a proportion of organisational share. This increases the tendency of shareholder to have no interest in the overview of managers. For instance, the managers can even take step for increasing the organisational size and it may not increase the profit of the organisation.




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