LON:ULVR | Unilever - Massively Increased Debt

19th Mar '18 by harrymunro

9 comments 4281 reads

Does anyone else share my concern at the continual increase of Unilever's debt? I hold shares in this company.

Currently standing at 147.8% net gearing.

2016 = 77.8%
2015 = 75%
2014 = 71.7%
2013 = 57.8%
2012 = 48%

The rationale for increasing the debt has been to fend off the Kraft Heinz acquisition as well as increase dividends for shareholders.

I personally don't think borrowing money as a means to pay for increased dividends amounts to good strategy. Carillion springs to mind!!

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Harrymunro

Premium Member

9 comments

Albertos

20th Mar '18

I agree.

But it's not just Unilever (LON:ULVR) many FTSE100 companies are in a similar situation.

Many of the classic shares are in a circular trap of high debt and high dividends - for example I struggle to see a way forward for GlaxoSmithKline (LON:GSK) - especially if they insist on being open to further acquisitions.

I understand how this situation has arisen - cheap debt. But the tide is turning on interest rates and therefore companies need to have a plan to pay down, which in many cases will require looking at dividend policy. But this will be unpopular and impact on the share price.

Currently I have a policy of not investing in companies with high debt levels, whether they be blue chip or not, for the above reasons.

Phil

PS I do have a minor stake in one highly geared company - Shire (LON:SHP) - but this is on the basis it has a negligible dividend and will use its resources to pay off the debt as quickly as possible.

cig

20th Mar '18

Would you buy Unilever bonds? If you think they're a bad deal for Unilever, it means they're a good deal for buyers. It's hard to see a good deal for bondholders here though, as they're borrowing at a negative real rate. If someone told you they give you £100 today as long as you pay back £95 in 5 years, would you say no? If you're prudent, you can always take the £5 and sit on the £95, and remain safe even if you borrow infinity.

Whether Unilever is prudent enough, I'm not sure, though not losing any sleep on it (I hold).

If you think that the "tide is turning" with interest rates, you should really sell all your shares and buy interest rate derivatives. They still don't price much of a turn (e.g. <2% for Sterling in 2023). The returns you can achieve there are orders of magnitude higher (subject to reality matching your expectations).

Albertos

20th Mar '18

No and no.

I like to keep it simple - there's plenty of companies out there with zero or manageable debt.

On Unilever, the graph above says it all for me.

Phil

daveinthelakes

20th Mar '18

We need to look at the structure of the Unilever (LON:ULVR) debt and the reasons behind increasing total debt.

I have not analysed the accounts but factors include-

- They have bought in higher yielding debt and issued new long term debt at a much lower fixed rate. This has had a capital cost but produced a much better debt profile to a large extent derisking future rises in interest rates. I think current cost of debt is now only circa 2.7%

- Undertaken a 5bn share buyback programme. As the dividend thereby saved is around 3.4% this is more than self financing with debt at 2.7%.

-Bought in and cancelled the high yielding preference shares for circa 3-400M.

As a result I think Interest payments have in fact fallen this year. In summary I think Unilever are competent in managing debt but please DYOR.

I do not hold.

JakNife

20th Mar '18

Typically, a lender looks at the ability of the borrower to service the debt and the most common way that is done in the banking market is to compare net debt to EBITDA. Stockopedia suggests that the net debt is EUR 20,138m and that the EBITDA is (EV of £121.50bn / EV to EBITDA ratio of 13.8) EUR 8.80m. That gives a net debt to EBITDA ratio of 2.29.

For quoted companies, banks typically like to see debt below a ratio of 3 times EBITDA and preferably below 2 times. Above 2 is normally only for a short term "spike", eg an "acquisition spike" that's expected to disappear within a short period of time.

So yes their debt is above normal but they've articulated why and have a plan in place to get it back down to normal levels.

Albertos

20th Mar '18

According to the Telegraph today Bain & Co has produced a report stating Brand Consumer Defensives hit their peak several years ago and are now just withering on the vine.

Don't hold any of these but suspect it should be bedtime reading for anyone who does.

Phil

NeilS

24th Mar '18

Thanks Phil here’s a link to the Bain report.
http://www.bain.com/publications/articles/overcoming-the-existential-crisis-in-consumer-goods.aspx

NeilS

24th Mar '18

Thanks Phil here’s a link to the Bain report.
http://www.bain.com/publications/articles/overcoming-the-existential-crisis-in-consumer-goods.aspx

jakehewitt

2nd Aug '19

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Unilever - massively increased debt

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Harrymunro

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