The Graham Value which is the geometric average of 1,5x book value and 15x Earnings per Share has decreased. The reason seems to be that Unilever is buying back shares at a large premium over book value which decreases book value per share and thus the Graham number. On the other hand debt per share is increasing, but so are Earnings per Share which could be considered more important than book value. Consider the trend of the Peter Lynch chart with Price and Earnings per Share lines. (Something seems to have gone wrong in this chart with the 4 to 1 stock split just before 2000.)
Seen from this perspective the increase in share price is more logical. As Peter Lynch liked to point out, if a company's Earnings per Share doubling, the share price will probably follow. The Earnings per Share increase is partly driven by share buybacks financed by increasing debt.
Graham Defensive analysis:
SECTOR: [PASS] Unilever is neither a technology nor financial Company, and therefore this methodology is applicable.
SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Unilever's sales of €53 715 million, based on 2017 sales, pass this test.
CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Unilever's current ratio €19 833m/€26 000 of 0.8 fails the test.
LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for Unilever is €24 000 million, while the net current assets are - €6 200 million. Unilever fails this test.
LONG-TERM EPS GROWTH: PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for Unilever increased roughly 50% over the past 10 years, therefore the company fails this criterion.
Earnings Yield: [FAIL] The Earnings/Price (E/P) ratio, based on the lesser of the current Earnings Yield or the yield using average earnings over the last 3 fiscal years, must be "sufficient", which this methodology states is greater than 6,6%. Stocks with higher Earning Yields are more defensive by nature. Unilever's E/P of 4% (using the current PE) fails this test.
Graham Number: [FAIL] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Unilever has a book value of €5 per share, a Graham Number of €15,3 per share and fails this test.
Conclusion 2018: I have been misreading Unilever in the past years.
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Graham Defensive analysis:
SECTOR: [PASS] Unilever is neither a technology nor financial Company, and therefore this methodology is applicable.
SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Unilever's sales of €53 715 million, based on 2017 sales, pass this test.
CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Unilever's current ratio €19 833m/€26 000 of 0.8 fails the test.
LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for Unilever is €24 000 million, while the net current assets are - €6 200 million. Unilever fails this test.
LONG-TERM EPS GROWTH: PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for Unilever increased roughly 50% over the past 10 years, therefore the company fails this criterion.
Earnings Yield: [FAIL] The Earnings/Price (E/P) ratio, based on the lesser of the current Earnings Yield or the yield using average earnings over the last 3 fiscal years, must be "sufficient", which this methodology states is greater than 6,6%. Stocks with higher Earning Yields are more defensive by nature. Unilever's E/P of 4% (using the current PE) fails this test.
Graham Number: [FAIL] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Unilever has a book value of €5 per share, a Graham Number of €15,3 per share and fails this test.
Dividend: 1,52/49 = 3%
Do you speak Dutch? If so please opt-in at www.valuemachinesfund.nl Thanks in advance! Comments, questions or E-mails welcome: ajb@valuemachinesfund.nl
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