Unilever (LSE:ULVR), changes in the wind.

This article appeared on my substack page a couple of days ago (https://piproberts25.substack.com/p/unilever-lseulvr-changes-in-the-wind?r=6kjdcg&utm_campaign=post-expanded-share&utm_medium=web)

Unilever (LSE:ULVR) is changing. It has plans to no longer simply be the mature consumer staples business it has been for decades. The plan is to demerge its food businesses, the creation of the Magnum Ice Cream Company already occurred. As such It is worth exploring what this means for the company and its case as an investment going forward.

Unilever remains focused on its Beauty & Wellbeing, Personal Care and Home Care products, with brands such as Dove, Vaseline, Hellmann’s, Rexona, Cif, Axe and many others. Unilever has concentrated its portfolio behind 30 Power Brands, which account for 78% of the company’s turnover.

These brands have a number of things in common. They have high levels of consumer recognition, significant barriers to entry for competitors and, as a result, give Unilever considerable pricing power.

The planned demerger of the food businesses should allow Unilever to focus more closely on the economics and logistics of its core consumer staples operations, potentially creating a more efficient business. Early signs are encouraging, with modest growth in sales, volumes and margins. While some of these improvements are relatively small and may be attributable to a range of factors, they are consistent with the thesis behind the restructuring.

Margins will be a key figure to watch. Early results suggest that improvements in productivity and cost savings are already ahead of schedule. If Unilever can continue to improve margins while simultaneously generating genuine volume growth, the investment case becomes considerably more attractive.

The increased management focus may also allow Unilever to pursue its emerging-market opportunities more effectively. Figures from the company’s 2025 annual report suggest that around 59% of turnover comes from emerging markets, particularly India, Southeast Asia and South America. Rising incomes, a growing middle class and urbanisation in these countries could lead to increased consumption of the types of branded products Unilever provides.

Whether this growth thesis ultimately comes to fruition or not, Unilever generated €5.9 billion in free cash flow in 2025 and returned approximately €6.0 billion to shareholders through dividends and share buybacks. There is therefore an income component to the investment case as well.

This is important because the growth investment case is not a short-term one. Unilever is a massive company, and it takes considerable growth to move the needle. Sustaining even modest 4–6% annual growth over an extended period would be a significant achievement for a business of this size.

It is also worth remembering that Unilever is a truly global company, meaning currency movements can have a significant impact on reported results. The 2025 annual report indicated that currency movements reduced reported sales growth, with the Latin American currencies, Indian rupee, US dollar and Turkish lira all depreciating against the euro. This is an important consideration when assessing the company’s reported financial performance from year to year.

The company’s transformation is still in its early stages. While the logic behind the strategy is sound, history suggests that corporate restructurings do not always translate into increased shareholder value. There is still a lot of this story to play out. The planned removal of the Foods business will also reduce diversification. The trade-off is that a more focused business may be more efficient, but it will also be less diversified

Unilever’s position in Beauty & Wellbeing and Personal Care is also interesting. The company largely occupies the middle ground, targeting mainstream and middle-class consumers. There is a wide range of more expensive, niche products aimed at wealthier consumers, as well as cheaper alternatives at the other end of the market. While Unilever has a dominant position in many of these categories, this is not an area where the company can afford to become complacent.

To its credit, Unilever has remained active with acquisitions, demonstrating that management is willing to adapt its portfolio and seek new sources of growth. However, acquisitions introduce their own risks, particularly around the prices paid for businesses and the ability to successfully integrate and grow those brands.

Unilever is a high-quality business, with return on equity remaining around the 30% mark. Management’s continued use of share buybacks also suggests a degree of confidence in the company’s future direction, although buybacks are only beneficial to shareholders when undertaken at sensible valuations.

Importantly for the investment case, Unilever’s valuation does not appear extreme by current market standards. Both the Acquirer’s Multiple and Joel Greenblatt’s Magic Formula produce relatively favourable results. The price-to-earnings ratio, currently around 20 times earnings, is not unreasonable for the quality and stability of the business being purchased.

Overall, I think Unilever is probably fairly valued in the current market. It is difficult to make a compelling case that the shares are dramatically undervalued, but equally, the valuation does not appear excessive given the quality of the underlying business, its strong brands, cash generation and potential for improving margins.

For me, this makes Unilever a company to watch rather than an obvious buy at any price. If there were a broad market correction that brought the valuation down while the underlying transformation continued to progress, Unilever could become considerably more attractive.