The payout is equivalent to 10.6 per cent of Unilever's stock market value. It dwarfs cash returns by other companies, which have included last week's pounds 1.5bn special dividend from Halifax.
Unilever said it was repaying the cash after failing to find suitable targets for major acquisitions. The company had been sitting on a huge cash pile after selling its speciality chemicals division to ICI for pounds 5bn in May 1997. Unilever had wanted to target emerging markets in the Far East and Latin America but found prices too high. "We have looked at a number of target companies but we are not convinced that any of them would give value to our shareholders," said Niall FitzGerald, the chairman. "Sometimes management's egos cash push people to do a deal. But we have decided that prices are just too high."
There had been speculation that Unilever might have looked at US companies such as Heinz and Best Foods, the former CPC group whose brands include Knorr soups and Skippy peanut spread. In the UK it has been linked with Reckitt & Colman, the Lemsip and Harpic household products group which issued a profits warning recently.
Analysts applauded the Unilever move, though the shares closed a penny lower at 624.5p after strong early gains. "It is a recognition that Unilever intends to reward shareholders and thus is very positive move. It would have been easy to have destroyed value," said Tim Potter, food industry analyst at Merrill Lynch.
Other analysts said the move might prompt other Anglo-Dutch groups such as Shell to return funds to shareholders after Unilever overcame tax problems that had previously hindered such moves.
Unilever's pounds 5bn payout will leave the group with pounds 1bn of net debt, though its healthy cash-generation will make the balance sheet strong enough for significant deals, analysts said.
The announcement came as Unilever revealed an 11 per cent increase in operating profits to pounds 3bn, before exceptional items. European sales were hit by lower ice-cream sales and the economic troubles in Russia. However, the launch of laundry tablets boosted Persil's market share. In the US, the Elizabeth Arden fragrance business returned to profit.
In the Far East, profits fell by 13 per cent due to the economic turmoil, but margins and market share were maintained.
Mr FitzGerald said the re-shaping of the group would continue, with 6 per cent of the business in the "underperforming" category compared with 20 per cent two years ago.
He also fired a warning shot at suppliers struggling to ensure their systems are millennium-compliant. He said 10-15 per cent were at risk of having their contracts terminated if they could not ensure supply.
Outlook, page 19