Hindustan Unilever Limited (HUL) has been a lot in news lately. But for all the wrong reasons. Be it for losing market share, falling profitability or not keeping to the unwritten rule of advertisement. Analysts have been discussing why the company is a spent force and that it should be written off. We in this article are not going to discuss all that. In fact, we are going to explore what happened the last time when the price of HUL hit its nadir and what happened 3 years after that.
In the last 5 years, the lowest price that the stock of HUL commanded was Rs. 127 in April, 2005. This price represents a trailing twelve month (TTM) PE of 24 times. For information sake, the stock at today's price of Rs 233 is trading at a PE of 21.5 times.
Dividend per share
However, let us look at the financials of the company. In CY04, the company was losing market share (sounds familiar?). It was fighting a price war with P&G and was losing profitability (sounds familiar again?). Furthermore, HUL had decided to divest its non-core businesses and had decided to focus on only a few key brands. How did the company perform after that? As we can see from the table, the company posted a healthy sales growth rate over the next 3 years at an average of 11.4% per year. The bottom line grew by 14% annually over the same period. From this what can we infer? HUL did not worry about its stock price but continued with business as usual. From the investor's point of view what happened? The dividend paid, from CY05 to CY07 was Rs 20.1. This means that solely on the basis of dividend an investor could have made a yield of 16% on investment over three years. And what of capital appreciation? We can see that from the graph below.
Point to point the share price increased by 82%, an annual increase of 22% for investors. So, a long term investor could have stuck with the company and doubled his money over a span of three years.
What can we conclude from this? The business of a company is to do business and not watch the stock market. HUL seems to be aware of that. The business of an investor is to find undervalued companies and invest in them from a long term view. Are we right in writing off HUL again? Only time will tell.
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