Evaluate Unilever’s financial strategy“
- Evaluate Unilever’s choice of sources of funds using appropriate theory
- Evaluate Unilever’s dividend policy by using appropriate theory
- Recommend an appropriate financial strategy for Unilever to be followed over the
next 3 years.
Introduction
Unilever started its journey in the year 1890 when its founder, Hesketh Lever began his
revolutionary ideas on cleanliness and discovered the Sunlight Soap brand to popularize hygiene
in the Victorian town in England. It was a way of promoting good health and a major
contribution to personal attractiveness and as a way of marketing his new discovery or product.
Evaluating Unilever sources of funds 2
Unilever founding companies began manufacturing products made from fats and oils, basically
margarine and soap products between the years 1900 and 1909. Unilever currently has over four
hundred brands which range from food items to affordable household cleaning products.
The capital structure of a firm refers to the different combination of how a company finances its
assets by combining equity or debts or a hybrid of the two or by a combination of securities. The
capital structure of Unilever is based on external financing. The proportion of a company’s long-
term and short-term debts determines its capital structure. Also its dividend policy. John Linters
model (Myers, 1984) indicates that the market stock prices generally responds to unanticipated
moves on dividend changes an observation that Miller and Modigliani also noted in 1961.
Changes in capital structure relay different messages to investors. (Miller and Modigliani, 1961)
Most of the theories relate to optimal capital structure. The static trade of is a framework where
a company targets a debt to value ratio that it gradually moves towards it and also adjusts its
dividends in the same way towards the payout ratio. The pecking order policy framework prefers
the internal financing to external financing and also prefers debt to equity if it deals in securities
like the Unilever. The company’s optimal debt ratio as the stated Static Tradeoff Theory is
determined by a tradeoff between costs and the benefits of holding a company’s assets,
borrowing and investment decisions. A company is supposed to balance and substitute its debt
for equity or its equity for debt for some time until the company’s value is maximized. (Peavler,
2012)
The corrected and new version of MM theory on debt and taxes indicate that any tax paying
company gains by borrowing; the more the marginal rate of tax the more the pain. (Miller, 1977)
However if a company is paying a lower at a lower rate, it would incur a net loss and instead it
should lend at a higher rate in order to gain. (Myers, 1984)
Evaluating Unilever sources of funds 3
Unilever major sources of funds are mostly from external financing. These were repaid by
interests which were very high. (Jalilvand and Harris, 1984)
Analyzing Unilevers Debt
Debt ratios indicate the how much the company is depending on debt capital to finance its
expansion strategies and operations. The uses of debt capital to fund a firm’s expansion or
acquisitions are beneficial to the firm as they attract some tax advantages. (Welsh, 1996)
Leverage ratios
Debt to Equity = Total debt/ Total Equity. It shows the company’s level of leverage and its
reliability on external financing. 30450/15716 = 1.94 and 32591/14921 = 2.2 for the years 2012
and 2011 respectively for Unilever. (Harvey, 1995)
Debt to Assets ratio = Total debt / Total assets = 30450/46166 = 0.65. The total debts is 65% of
the value of the total assets in 2012 and for the year 2011 was 32591/47512 = 0.69 which is 69%.
In 2010, the Debts to equity ratio was = 26089/41167 = 0.63 which is 63%. (Barges, 1982)
Unilever depends on external financing to finance its operations and acquisitions strategies.
Unilever Balance Sheet for the years 2012 – 2010
2012 2011 2010
Goodwill and intangible
assets
21718 21913 18278
Other non-current assets 12301 11308 10405
Current assets 12147 14291 12484
Total assets 46166 47512 41167
Current liabilities 15815 17929 13606
Noncurrent liabilities 14635 14662 12483
Total liabilities 30450 32591 26089
Shareholders’ equity 15159 14293 14485
Non controlling interest 557 628 593
Evaluating Unilever sources of funds 4
Total equity 15716 14921 15078
Total liabilities and equity 46166 47512 41167
Unilever Cash flow for the year 2012 – 2010 (Million pounds)
2012 2011 2010
Net increase/decrease in cash and
cash Equivalent
6836 5452 5490
Net cash flow – Investing
activities
-755 -4467 -1164
Net cash flow – Financing activities -6622 411 -4609
Net increase/decrease in cash and
cash Equivalent
-541 1396 -283
Cash and cash equivalents as
at 1 January
2978 1966 2397
Effect of foreign Ex rate
changes
-220 -384 -148
Cash and cash equivalents as at 31
December
2217 2978 1966
Unilever’s financing in the year 2012 increased to €6622 from the previous €411 in 2011 while
in the year 2010 it was €4609. This represented an increase of about 1511% from the year 2011.
Performance Indicators
2012 2011 2010
Sales growth 6.90% 6.50% 4.10%
Volume growth 3.40% 1.60% 5.80%
Core operating
margin
13.80% 13.50% 13.60%
Free cash flow 4333 3075 3365
The capital structure of Unilever for the year 2012 was made up of the following:
Evaluating Unilever sources of funds 5
.
0
500
1000
1500
2000
2500
3000
3500
Due within 1 yr
Due 1-3yrs
Due 3-5yrs
Due over 5 yrs
Unilever Contractual obligations as at 31 December 2012
Total Due within Due 1-3yrs Due 3-5yrs Due over
1 year 5 years
Long term debt 9920 2539 2521 2976 2784
interest financial liabilities 2839 341 515 380 1603
operating lease obligation 1947 383 588 427 549
Purchase obligation 354 294 37 11 12
Finance leases 350 28 73 46 203
Long term commitment 1889 865 740 221 63
Total 17299 4450 4474 3161 5214
www.unilever .com
Unilever Free cash increased by €1.2 billion to €4.3 billion in 2012 these was due to increased
operating profits and improved management in capital structures. The financing costs of
Unilever expansion strategy was €390 million in 2012 while in the year 2011 it was €448. The
leverage net debt was €8.9 billion in 2012 while in 2011 it was €8.2. The cost of debt was 3.5%
and 2.9% on cash deposits. The cost of financing pensions was €7 million while in 2011 it was
€71 million. (Damodaran, 2005)
Analyzing Unilever’s financial liquidity
Evaluating Unilever sources of funds 6
Liquid assets are assets that can be quickly converted to cash. The current ratio of Unilever for
the year 2012 was 46166/30450 = 1.5 which below the average standard that’s 2 i.e. the assets
should be twice the total liabilities. In the year 2011 the ratio was 47512/32591 = 1.5. Unilever’s
debts are higher than the required average.
Unilevers Debts
1
2
3
4
The optimal debt ratio depends on a firm’s ability to adjust its equity and debt ratio to achieve a
balance that is profitable for its financing activities. (Myers, 1984) A company may decide not to
utilize its huge debts if it’s under levered or to decrease its debt if it’s over levered.(DeAngelo,
and Masulis, 1980) Unilever risks of its dependence on external debt financing may eventually
be unsustainable if the rate of taxes increase in future or if the interest rates increase.
Evaluating Unilever sources of funds 7
References
Barges, A., (1982) The Effect of Capital Structure on the Cost of Capital, Prentice-Hall, Inc.,
Englewood
Damodaran, A. (2005). Finding the right financing mix: The capital structure decision.
DeAngelo, H., and R. Masulis, (1980) “Optimal Capital Structure Under Corporate and Personal
Taxation,” Journal of Financial Economics, 8 3-29.
Evaluating Unilever sources of funds 8
Harvey, C. (1995). The capital structure and payout policy,
Jalilvand, A. and R. S. Harris, (1984) ”Corporate Behavior in Adjusting Capital and Dividend
Policy: An Econometric Study,” Journal of Finance, 39 127-145.
Miller, M., (1977) “Debt and Taxes,” Journal of Finance, 32 261-275.
Miller, M., and F. Modigliani, (1961) “Dividend Policy, Growth and the Valuation of Shares,”
Journal of Business, 34,411-433
Myers, S.C. (1984) The Capital Structure Puzzle, The Journal of Finance, July 1984, Vol.
XXXIX, No 3.
Myers, S. (1984)”The Search for Optimal Capital Structure,” Midland Corporate Finance
Journal, 1592 The Journal of Finance
Peavler, R. (2012). Debt and equity financing.
Welsh, I., (1996). A primer on capital structure. The John E. Anderson Graduate School of
Management, University of California, Los Angeles.
