Unilever PLC (UL - Free Report) has reportedly decided to sell its shrinking spreads business, including brands like Flora and Stork butter. Furthermore, the company announced that it would buy back shares, hike its dividends, raise its target for cost savings and combine its foods and refreshments businesses.
The move came after the company undertook a strategic review of its business, aiming to deliver growth, boost shareholder value and gain investor support following the unsolicited $143 billion takeover offer by Kraft Heinz Co. (KHC - Free Report) in Feb 2017. However, this bid compelled Unilever to prove its standing that it can deliver profits amid slowing growth and increasing competition in the global packaged goods industry.
In this regard, the maker of Dove products and Ben & Jerry has planned to sell or spin off its spreads division, which has been witnessing a slowdown for the past few quarters. Unilever also stated that it is integrating its food and refreshment businesses into a Netherlands-based unit. Since the company is listed both in Amsterdam and London, it is looking to simplify its corporate structure to ease the process of buying or disposing of businesses.
Even though the changes will result in some job cuts in senior and middle management, it will bring savings from its procurement and marketing operations. Among other changes, Unilever plans to reduce the number of its commissioned advertisements by 30%.
The company raised its cost-savings target to 6 billion euros from 4 billion euros and hiked its dividend by 12%. It will also launch a share buyback of 5 billion euros ($5.3 billion) this year. Moreover, it has set a target for net debt of two times EBITDA , which would mean enough flexibility for acquisitions or returning cash to shareholders.
It is encouraging that Unilever has undertaken a program called “Connected 4 Growth” to reduce costs, under which individual expenses are reviewed during each accounting period rather than rolled over. The company is also consistently focusing on product improvement through innovation. Moreover, Unilever has entered into many deals to fortify its position in home care and personal care products. These acquisitions will strengthen its portfolio and generate substantial revenues.
Meanwhile, the company continues to struggle with declining volumes in Brazil and a soft economy in Russia. Further, it is witnessing softness in the developed markets in North America or Europe with little sign of recovery. Additionally, it has been delivering weak results for the past few quarters due to sluggishness in the emerging markets, which account for about two-thirds of the company’s total revenue. Though these markets offer robust long-term prospects, they are generally volatile.
Coming to the share price movement, prices spiked following news of the probable takeover. The stock rallied 16.46% since Feb 16, when Kraft offered a takeover bid, outperforming the Zacks categorized Soap & Cleaning Preparations industry, which only gained 4.75%.
Unilever currently has a Zacks Rank #2 (Buy).
Stocks that Warrant a Look
Other stocks worth considering in the food industry include ConAgra Foods, Inc. (CAG - Free Report) and Pinnacle Foods, Inc. (PF - Free Report) , each carrying a Zacks Rank #2. You can seethe complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While ConAgra Foods has a long-term earnings growth rate of 8.00%, Pinnacle has a growth rate of 8.33%.
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