Investiv Daily Has Arrived

[When CEOs Become Delusional: The Case of Unilever’s Polman]( By Sven Carlin on May 16, 2017 - Unilever CEO Polman declared himself more competent than Buffet just because Unilever has outperformed Berkshire in the last 8 years. The funny thing is, Unilever outperformed thanks to Buffett. - Not only that, but Berkshire outperformed Unilever on revenue and earnings while at equal valuations, Berkshire would also largely outperform. - The 8-year bull market has clearly gotten into some CEOs’ heads. This creates a very dangerous situation for long term shareholder value creation. Introduction In an interview with Jim Cramer, I was thunderstruck to hear Unilever’s CEO (NYSE: [UL]( Paul Polman, tell the world that his returns have been better in the last 8 years than Buffett’s Berkshire Hathaway (NYSE: [BRK.A]( [BRK.B](. Comparing oneself to Buffett is one thing, but Polman putting in out there in the open that he is better than Buffett—the 4th richest guy on the [planet]( an amazing track record, one that goes beyond one economic cycle and that is clearly above Buffett’s. If he doesn’t have such a track record we can call him delusional without any worry. In today’s article, we’ll see whether Mr. Polman is right as we’ll compare the performances and discuss the danger long term shareholders incur from bad and delusional management. Few understand that a rising tide lifts all boats. An 8-year-old bull market with interest rates close to zero can easily get to one’s head, especially if you’re a CEO of a multinational company and you think that you are the reason for the excellent performance, but all CEOs should really thank the Yellens and Draghis of this world first, and only then brag about their skills in public. Polman vs. Buffett Polman has been UL’s CEO since January 2009, so let’s compare UL’s and BRK’s stock performances since then. The first thing I did when I heard Polman’s statement was to check if he really outperformed Buffett. I was really surprised to see that he actually hadn’t. Figure 1: UL’s stock (134%) has underperformed both the S&P 500 (189%), and BRK (173%) since January 2009. Source: [Nasdaq](. For the sake of fairness, we should add UL’s dividend to the stock performance and reinvest the dividend into the company. When doing that, UL has outperformed BRK as $100,000 invested in UL in 2009, when Polman became CEO, would now be worth $331,037. Polman is completely right, $100,000 invested in BRK would on the same day, the 1st of January 2009, would now only be $272,867. Thus, Polman is far better than Buffet as he outperformed him by 17.5 percentage points in an 8-year long bull market. The funny thing is that UL outperformed BRK thanks to Buffett. The Kraft Heinz Company (NASDAQ: [KHC]( partly owned by BRK, offered $50 per share to buy UL when UL was trading at $42. Since then, UL’s stock has appreciated as the company is pursuing other options. Figure 2: UL’s stock price increased thanks to Buffett. Source: [Nasdaq](. Without Buffett’s offer, using a stock price of $42 for UL, $100,000 invested in UL in 2009 would now be worth $257,855, or $15,000 less than had that $100,000 been invested in BRK. So Polman should thank Buffett for the improved performance and not go around telling the world how he is better than Buffett. Additionally, the wise investor knows that stock performance isn’t really an indication of managerial quality, especially in a market that just goes up and in an economy where many have a vague memory of what a recession really looks like. What we have to look at is how much shareholder value Polman has created and compare it to what Buffett has done. Buffett’s favorite measure of performance is, of course, book value because it isn’t under the influence of market vagaries and short term stock boosts coming from buybacks. Comparing book values shows that Buffett clearly outperformed as UL’s book value per share practically hasn’t moved since 2009 while BRK’s has more than doubled. Figure 3: Book value BRK, UL, and UL with dividends. Source: [Morningstar](. "Artificial Intelligence" Is Crushing Buy And Hold Investing The compound annual returns generated by computer automated trading strategies have crushed buy and hold investing. One strategy, disclosed just ahead, has produced compound annual returns 56X greater than the S&P 500. Deploying this logic in your portfolio could be a retirement game changer. To see how you can put this Artificial Investing Intelligence to work in your portfolio [click here.]( [Misunderstood Option Strategy Earns Novice Trader $41 Million In Only 3 Years]( Find out how you can use it to immediately generate substantial income when the market opens on Monday... even if you're starting with limited funds. It's safe, reliable, and can be duplicated over and over again to generate income you can use right now if you want. Or you can let it snowball into even more. [Click Here To Learn This Strategy]( For the sake of fairness, I have added a line above where I’ve kept UL’s dividends. In that case, Polman outperformed Buffett again as UL’s book value would have increased from $4.58 in January 2009 to the current $15.32. Now, you’re probably wondering what I’m smoking (I live in the Netherlands but I don’t use any drugs, don’t worry) because Polman is right in his statement as he has both outperformed Buffett by market value and by book value. Well, let me show you how things are a bit different below the surface and that what UL’s CEO is thinking is extremely dangerous. First, UL’s 2008 revenue, when Polman took over, was €40 billion while BRK’s was $107 billion. For 2016, UL’s revenue was €52.7 billion, representing an increase of 30% in 8 years. BRK’s revenue has increased to $236 billion which represents an increase of 120%. Similarly, UL’s net income for 2008 was €5.02 billion and is now €5.1 billion, representing an increase of 1.5%, while BRK’s was $4.9 billion in 2008 and is now $22.5 billion. Given BRK’s volatile earnings, I’ll use the 2008 net income of $13.2 billion to calculate the increase, i.e. 70%. So, if you’re a shareholder, what kind of manager would you prefer? One that increases revenues by 120%, or one that increases revenues by 30%? One that increases net income by 70%, or one that increases it by 1.5% in 8 years? One that measures their quality by looking at the stock price, or one that measures their quality by how much real value they have created for the shareholder? Further, let me make a few important points. UL’s price earnings (P/E) ratio is 26.3, while BRK’s is 17.86. At the same valuation, the initial market outperformance would be on Buffet’s side as $100,000 invested in BRK in 2009 would now be worth $402,331 compared to UL’s $331,037 with all dividends reinvested. UL’s dividend payout ratio is around 70% for a dividend yield of 2.95%. If BRK payed out 70% of earnings in the form of dividends, its dividend per share would be $9,599 giving you a dividend yield of 3.9%. At an equal yield of 2.95%, BRK’s share would be worth $325,389. The $100,000 invested in BRK in 2009 would then be $362,105, thus again beating UL’s investment return. This again shows how stupid it is to use stock prices to measure managerial quality. In addition to the above market valuation metric differences, UL increased total liabilities from €28.3 billion to the current €40 billion. As the 41% increase in liabilities hasn’t improved earnings at all and revenue growth of 30% in 8 years can be mostly attributed to inflation and the 30% appreciation of the dollar, I wonder how anyone can call UL’s management competent. Well, nobody really is calling them competent, so they have to do it themselves. The above is a clear indication of how delusional Polman is as he thinks he is the reason for UL’s stock outperformance. Further, UL’s P/E ratio in 2009 was 19 while now is 26.3. A return to a P/E ratio of 19 would result in a share price of $38.12 which is a 28% decline compared to current prices. Going back to the $100,000 initial investment, it would decline to $234,034, which again means UL is underperforming BRK. Conclusion I can imagine Buffett sitting in his office last Friday evening watching CNBC and breathing a sigh of relief for not squandering his money on a costly acquisition with bad management. As he often likes to say, when he has too much money, he is more prone to make stupid investments. Hopefully his next acquisition attempt will be much wiser than UL. On the other hand, and another indication of Polman’s incompetence, is the fact that Buffett’s partner, 3G’s Jorge Paolo Leman, was after UL through Kraft Heinz because he is known for buying poorly run companies and exponentially increasing their efficiency through cost cutting and synergies. Given that Polman increased UL’s net income by a whopping 1.5% in 8 years, I would conclude that the only reason why Polman and other UL managers were against the acquisition is for their own salaries and benefits. The moral of the story is BRK’s shareholders are better off without UL, while UL’s shareholders would be better off without Polman. I urge UL’s board of directors to, if they don’t want to sell the company to Buffett, at least fire Polman because he hasn’t really improved anything in the last 9 years while the stock performance is just the result of a bull market. The options for UL are to sell themselves to Buffett or to hire someone like 3G’s Paolo Leman who knows how to improve efficiency and grow shareholder value. As a thank you note from UL’s shareholders, I would be happy with $16,000. This is Polman’s salary for half a day of work as his yearly compensation is around $9 million, and I spent just about an evening writing this article. They can [contact Investiv]( for the payment details, hopefully the management is competent enough to do that. On Corporate Management A clear thing that I see in the corporate world is that the management is seldom questioned if the company is profitable. If the company loses money, then the CEO is at risk while if the company remains profitable, it doesn’t really matter whether the management is improving things or not. UL is a clear example of a behemoth that isn’t growing and would be much better off with new management. I feel bad for UL’s shareholders as their returns could have been much higher if the management had been focused on improving and growing the business and not just on where the stock price was going. [No Comments »]( | Filed under: [Berkshire Hathaway]( [Corporate Earnings]( [Dividends]( [Interest Rates]( [Investiv Daily]( [Unilever]( [Warren Buffett]( | Tags: No Tags --------------------------------------------------------------- If you are having trouble reading this email, you may [view the online version]( This email was sent to {EMAIL} by Investiv, LLC 3400 North Ashton Blvd. | Suite 170 | Lehi | UT | 84043 [Forward to a friend]( | [Unsubscribe]( Disclaimers Investing is Inherently Risky There are risks inherent in all investments, which may make such investments unsuitable for certain persons. These include, for example, economic, political, currency exchange, rate fluctuations, and limited availability of information on international securities. You may lose all of your money trading and investing. Do NOT enter any trade without fully understanding the worst-case scenarios of that trade. And do NOT trade with money you cannot afford to lose. Past performance of an investment is not necessarily indicative of its future results. No assurance can be given that any implied recommendation will be profitable or will not be subject to losses. Hypothetical Results Are Reported Results and examples used in the Company’s advertisements, books, videos, websites, and other media—including on the Site and the Network—are, in some cases, based on hypothetical (simulated) trades. Plainly speaking, these trades were not actually executed. Hypothetical performance results have certain limitations. Unlike an actual performance record, hypothetical results do not represent actual trading. Also, since the trades have not been executed, the hypothetical results may have under-or-over compensation for the impact, if any, of certain market factors, such as lack of liquidity. Hypothetical trading programs generally are also subject to the fact that they are designed with the benefit of hindsight. Hypothetical results also do not account for commissions or slippage. The Company’s simulations assume purchase and sale prices believed to be attainable. Yet traders are going to be getting into trades at different times and using various exit approaches, which may result in different pricing and outcomes. You may or may not receive the best available price on the purchase or the sale of a position in actual trading. Information provided by the Company is not investment advice. The Company is not a registered investment adviser, stock broker, or brokerage. You agree that the Company does not represent, warrant, or take responsibility that any account will or is likely to achieve profit or losses similar to those shown. Examples published by the Company are selected for illustrative purposes only. They are not typical and do not represent the typical results of all stocks within the Company’s software or its individual scans and searches. No independent party has audited any hypothetical performance contained at this Web site, nor has any independent party undertaken to confirm that they reflect the trading method under the assumptions or conditions specified. Offers Disinterested Commentary and Analysis The Company does not receive any form of payment or other compensation for publishing information, news, research, or any other material concerning specific securities on the Network that is intended to affect or influence the value of securities. The Company, and its personnel, do not engage in front-running of recommendations and do not trade against one’s own recommendations. The Company and its management may benefit from an increase or decrease in the share prices of the profiled companies, and/or may have other actual or potential conflicts of interest. If a particular security featured in a newsletter publication is concurrently owned by the Company in its corporate brokerage account, or in any of the individual accounts of the Company’s principals or analysts / writers, that fact will be disclosed. The Company, its principals, analysts and writers may choose to purchase a security or derivative featured in one of its newsletter publications, but typically will wait three (3) trading days from the date of publication before initiating said purchase. [Disclaimers, Terms & Conditions]( | [Privacy Policy]( Copyright 2017