Unilever PLC (LON:ULVR)

Investment Thesis

👁 What to Watch

• Q2 2026 trading update expected late July: volume growth above 2% remains critical.
• Regulatory approval timeline for McCormick deal (FTC, EU Commission, CMA).
• McCormick shareholder vote on the combination transaction.
• Execution of second €1.5B buyback tranche contingent on deal progress.
• Indonesia and China operational reset trends in upcoming earnings.
• Underlying operating margin trajectory post-Foods separation.

The Health sub-score improved from 51 to 56, reflecting stronger operating cash flow backing of £7.8B versus net income of £6.0B. This robust cash conversion supports the F-Score of 7/9, which indicates a strong improver profile with solid profitability and leverage metrics.

The Z-Score stands at 2.86, placing the company firmly in the safe zone with low bankruptcy risk. Interest coverage remains very strong at 42.2x, indicating ample capacity to service debt obligations. Net gearing of 156% is moderate but manageable given the predictable cash flows.

Current ratio of 0.76 and quick ratio of 0.55 appear weak on paper but are typical for FMCG companies with negative working capital cycles. Unilever collects from retailers faster than it pays suppliers, generating structural cash flow advantages rather than liquidity distress.

The Quality sub-score of 65 reflects strong underlying profitability metrics. Underlying operating margin expanded to 20.0% in FY2025, up 60bps year-on-year, driven by productivity savings and favorable mix shifts toward higher-margin Beauty and Personal Care categories.

Return on equity remains healthy at 13.9%, while ROCE of 15.6% demonstrates efficient capital deployment. Gross margin improved to 46.9% (+20bps), benefiting from easing input cost inflation and successful premiumisation strategies across key brands.

Free cash flow conversion reached 100% in FY2025, generating €5.9B against underlying operating profit of €10.1B. This strong cash generation underpins the dividend policy and supports the €6B buyback programme announced alongside the McCormick deal.

The Growth sub-score of 14 appears depressed by historical reported revenue contraction due to currency headwinds and disposals. However, underlying organic growth tells a more encouraging story, with Q1 2026 volume growth accelerating to +2.9%.

Underlying sales growth reached 3.8% in Q1, supported by strong performance in Home Care (6.1% USG) and emerging markets (5.7% USG). Power Brands, representing 78% of turnover, grew at 4.3% USG, outpacing the group average.

Full-year 2026 guidance has been trimmed to the lower end of the 4–6% USG range, reflecting cautious macro conditions in developed markets. The focus remains on achieving at least 2% volume growth while maintaining modest margin improvement above 20.0%.

The Value sub-score declined from 47 to 44, consistent with the share price rising 6.6% since the last report without corresponding earnings revisions. The trailing P/E of 24.3x appears premium for a diversified FMCG company.

However, the forward P/E of 19.0x is fairer when accounting for expected earnings growth and portfolio transformation. The EV/EBITDA multiple of 13.9x is reasonable for a global consumer goods leader with strong brand moats.

Total shareholder yield combines a 3.32% dividend yield with the €6B buyback programme, providing substantial capital return optionality. The McCormick deal completion could trigger significant re-rating as Unilever transitions to a focused premium personal care compounder.

The DivHealth sub-score improved from 19 to 24, reflecting better cash flow coverage metrics. The structural payout ratio of approximately 64% is sustainable and typical for mature FMCG companies with predictable cash flows.

Free cash flow cover stands at 1.96x, providing comfortable cushion for the quarterly dividend payments. The Q1 2026 dividend was raised 3% to €0.4664 per share, continuing the progressive policy under new CEO Fernando Fernandez.

The combination of regular dividend growth and substantial buyback capacity creates attractive total return potential. With €15.7B cash inflow expected from the McCormick deal, additional capital return flexibility exists beyond the current €6B programme.

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