Date: May 29, 2013
Dear Fellow Investor
Around the time of the Millennium, it was very unfashionable to own, or even consider buying, any share that was not related to telecoms, new media or technology. You almost certainly didn’t want to be seen to be keen on the consumer goods sector. Not unless you enjoyed being ridiculed.
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However, I am never swayed by investing trends. At the time, I was interested in a business called Unilever and nobody was going to dissuade me from taking a closer look at the company. Here in Singapore we know Unilever through brands such as Wall’s, Lipton, Sunsilk and Breeze. But apart from being decidedly untrendy, Unilever also suffered from a couple of other problems that I was warned about. Elephants don’t gallop Firstly, I was told that the company was a slow-growing business. That’s because it was already a massive global operator. Consequently, it was unlikely to grow its sales or profits quickly. It is often said that elephants don’t gallop, and Unilever was undoubtedly a beast of jumbo proportions. The perceived wisdom was that Unilever was unlikely to ever reward shareholders with rapid share-price growth. But I had a different view. I wanted to own a share that would reward me in a different way. I wanted regular income, which was something that Unilever had a good record of delivering. I wasn’t too concerned about the share price in the short term, as I wanted a share that was capable of paying rising dividends over time. As far as my thesis was concerned, Unilever produced goods that people wanted to buy. It made desirable products, that included detergents, frozen foods, ice cream, and sprays that made you smell nice on a hot summer’s day. What’s more, the people who bought these “boring” items kept coming back for more. That meant Unilever generated oodles of cash on a regular basis. Consequently, it could afford to reward its shareholders with a generous income. Typically, it would pay out around half its profits in the form of dividends. And it had a good track record of raising its payout regularly, too. A sprawl of acquisitions The other problem I was warned about was that, back in 2000, Unilever was a sprawling mess. It loved to make acquisitions. Not just tiny bolt-on purchases, but mega deals. Often it would buy another large firm, and then keep the bits it wanted, while disposing of the rest at some later date. The upshot was that Unilever’s accounts were peppered with exceptional charges and goodwill write-downs, and this made them messy to analyse. However, I could see an underlying method to Unilever’s maddening acquisition strategy. It wanted its products to be leaders in their marketplace. So, products that failed to make the grade were ruthlessly pruned, in order to release resources that could be deployed better elsewhere. How my thesis played out I could see many attractions to Unilever as a long-term investment, even though many others, at the time, could not. As far as I was concerned, Unilever was an inexpensive income generator. If my thesis was right, it should deliver a decent return in the long run, even though the short-term returns might trail the then tech-obsessed market. Since buying Unilever shares, they have rewarded me more than three times over, which equates to a total return of over 10% a year. What’s more, the reasons I bought the shares over a decade ago are still intact today. So, I am perfectly happy to continue holding them. The lesson for me is that, when you invest, it is important to take a step back from what everyone else is doing, and to build a proper long-term thesis. Don’t just follow the fashionable stocks of the day. That goes for the fashionable commodity, asset class and geographic region of the day too. To your investing David Kuo Director, The Motley Fool Singapore This article is contributed by The Motley Fool Singapore |
