The Investment column: Unilever's new approach pays off

It may only be 17 months since Niall FitzGerald took over as chairman of Unilever but shareholders in the consumer goods giant have certainly enjoyed the difference.

In that period Unilever shares have significantly outperformed the market, increasing by around 50 per cent. Mr FitzGerald's focus on total shareholder return, a method of comparing performance using share price appreciation and dividends, has pleased the City and his more muscular approach to management appears to be paying off.

Underperformers are being subjected to more rigorous scrutiny and are being given the opportunity to improve, be run for cash or be sold. The rump of laggards, which constituted 20 per cent of Unilever's sales in 1996, has now been reduced to 13 per cent, or around pounds 2bn of sales.

The plan is to concentrate on higher-margin businesses in mature markets like Europe and the US while investing in emerging markets such as the South-east Asia and central and eastern Europe.

The message from yesterday's results was that the strategy is on track. Pre-tax profits of pounds 4.78bn included a pounds 2.4bn profit on the sale of the speciality chemicals business to ICI last year. But stripping out currency factors and exceptionals, profits rose by 13 per cent.

Management's confidence in the business is demonstrated by their decision to increase spending on advertising and promotion to a record pounds 3.6bn, or 12 per cent of sales. Volumes were stronger in the final quarter than at the beginning of the year and the cost-cutting is starting to show through.

The big question with Unilever remains its pounds 3.2bn cash pile. Mr FitzGerald would not be drawn on plans yesterday beyond saying that if no suitable acquisitions could be found within the next two years, the cash would be returned to shareholders. The betting is that the funds will be spent on a number of smaller deals in emerging markets rather than one blockbuster deal. The financial crisis in Asia could provide acquisition opportunities there.

However the turmoil is a double edged sword. It will hit Unilever's profits this year, though countries such as Thailand and Indonesia only account for around 3 per cent of groups sales.

On full year forecasts of pounds 2.9bn, the shares, up 1.75p to 524p yesterday, trade on a forward rating of 22. That is a sizeable premium to the market which leaves no room for error. Probably too expensive for now.