Higher input costs have been the monster coming over the hill for many companies for months now. Unilever, one of the world’s largest consumer goods group making everything from Hellmann’s mayonnaise to Sure deodorant, is an obvious casualty.
Despite stagnant margins being built into consensus analyst forecasts already, investors sent shares in the company down by nearly 6 per cent after it revealed that predicting where the full-year margin would land would be much more difficult than usual. Higher crude oil, soya bean and palm oil costs, as well as increases in packaging and freight, mean that average input cost inflation in the high-teens is expected in the second half of this year. Price increases thus far, which reached a rate of 2 per cent by June, don’t look like they’re going to cut it.
Even before the latest market sell-off, Unilever’s shares had underperformed the wider FTSE 100 over the past two years. Some of that will have been down to the cyclical recovery enjoyed by the index on the back of hopes for a stronger economic rebound — but then consider, too, that the company also underperformed almost all its publicly traded peers during that period, including Reckitt Benckiser, Henkel, of Germany, and the Swiss-based Nestlé. You can see why investors might have little tolerance for any disappointment.
The focus for investors is usually on the 3 per cent to 5 per cent target range for underlying sales growth. For a mature giant like Unilever, pushing revenue consistently higher is no easy task. How could it improve its chances of convincingly boosting sales? Perhaps by taking a more cut-throat approach to ditching low-growth parts of its sprawling portfolio. Last year it said that it would separate the bulk of its tea business either via a stock market flotation or sale. A final decision is due to be made in October, 22 months after the review of the business was announced.
Over the past 18 months annual performance comparisons for the foods and refreshment division have been helped by more consumers eating at home during lockdown. Over the first six months of this year, the segment generated an unusual 8.1 per cent rise in underlying sales. Yet over each of the four years before 2020, the business has lagged the beauty and personal care and home care divisions and had failed to muster more than a 2.7 per cent rise in underlying sales over the three years leading up to the pandemic.
High-growth product categories such as functional nutrition, which includes Horlicks, the malted drink, and prestige beauty (think Dermalogica or Kate Somerville, the skincare brands), might be delivering impressive growth, but a weaker showing from foods and refreshment, which typically has accounted for about 40 per cent of group sales, makes achieving the 4 per cent mid-point of the sales growth target range a tall order. Ice cream has been a solid performer, but savoury products such as Knorr, the stock cubes, or dressings such as Hellmann’s could be targets for the chop.
Still, there are positives for shareholders. In April Unilever said that it would buy back €3 billion in shares this year, the first return of this type since 2018. And analysts have forecast a dividend of 1.68 cents per share for this year, which in itself would equate to a respectable potential dividend yield of 3.5 per cent, based on the present share price and exchange rate.
The shares are priced at an historically weaker forward earnings multiple of 20, but catalysts for a real re-rating in the shares might be tougher to find.
ADVICE Hold
WHY The shares hold decent income potential, but a lower valuation reflects tepid sales growth and uncertainty over margins
AJ Bell
Retail investors are often forgotten by London-listed corporates, frequently frozen out of initial public offerings and diluted by share placings that they are not given the opportunity to participate in. Yet for investment platform providers such as Hargreaves Lansdown and AJ Bell, this swelling group of investors have pushed profits higher.
For AJ Bell, the dying down of the extreme turbulence that swept through markets last year has not led to any sizeable easing in flows or new customers to its offerings. The core direct-to-consumer platform gained £1 billion in net inflows during the three months to the end of June, equivalent to 5.9 per cent of opening assets under management, while customer numbers rose by 6 per cent, or 32 per cent on the previous year.
A new breed of younger investors are credited with rising inflows, but the platform is also gaining traction with advisors, who added a net £1.1 billion during the quarter. Together with investment gains of £3.4 billion, that took its assets under management to £70.4 billion.
The figure is near the full-year consensus forecast of £71.4 billion, so analysts at Jefferies reckon that upgrades are on the way. Earnings forecasts for this year and next have already been consistently upgraded since last April.
The stratospheric rise in “meme stocks” such as GameStop, the retailer, and AMC, the cinemas group, is an extreme example of the power that a retail investment community can hold. The fact that AJ Bell’s customer numbers have risen each quarter since the group went public in 2019 indicates a more credible — and sustainable — growth trend. Better still, investment platform customers generally are loyal, while high fixed costs mean rising inflows translate to profit growth.
That said, the solid investment case behind AJ Bell and the bigger Hargreaves Lansdown hasn’t been missed by the market. Shares in the challenger are trading at a pricey 36 times forecast earnings this year, a premium to Hargreaves at a multiple of 25. That is not one that can really be justified.
ADVICE Hold
WHY Good grounds for earnings growth, but potential already priced into shares
