Week by week, the cost-of-living crisis is pushing up the prices of everyday items such as shower gel and washing liquid.
Household goods giants Unilever and Reckitt both told a tale of price inflation when they reported results last week, but raised profit guidance too, suggesting that sales remain strong even though customers’ purses are getting lighter.
Many analysts are fans of the stocks, citing their well-loved brands as strong and trustworthy. They also praise a successful turnaround story at Reckitt, and entrenched emerging market positions and high margins at Unilever. Both companies pay good dividends, too.
Sparkle: Unilever, which makes the household cleaner Cif, has loyal customers willing to pay higher prices
But there’s a big question mark over the next few years for both businesses as we all wrestle with rising bills. It is understandably tempting to buy an own-brand kitchen cleaner rather than a more expensive bottle such as Cif when the prices get higher. Indeed, it will be fascinating to see how shoppers will react to Marmite, made by Unilever, costing 11 per cent more.
Meanwhile, as the inflation wave continues to buffet us, is Reckitt, manufacturers of Durex, the protection your portfolio needs, or will it, as the maker of Gaviscon, too, give your investments indigestion?
First, consider Unilever, the former Anglo-Dutch conglomerate that became fully British in 2020 in a simplification of its share structure.
The company may have streamlined from a corporate perspective, but it is still a global tangle of 400 brands, with the strongest including Dove, Lifebuoy and Knorr.
And juggling responsibilities has been far from simple for the management. The company’s share price has lagged the market since 2017 when it rejected a bid for rival Kraft.
In January, Unilever made its own bid for the consumer business of pharmaceutical giant GlaxoSmithKline. This failed, and the Sensodyne, Aquafresh and Chapstick business has now been spun out of GSK as Haleon.
Veteran investor Terry Smith did not mince his words on the episode, describing it as a ‘near-death experience’ for Unilever, and suggesting the management should step down.
Smith – a big Unilever shareholder, via investment fund Fundsmith Equity – is not the only investor the management should worry about. In May, activist shareholder Nelson Peltz joined the board, raising speculation that he would shake up operations and possibly even force a breakup, as he has with other businesses.
As a result, the company had a lot to prove with last week’s first-half figures. It delivered – up to a point. The company posted a sales volume decline of 1.6 per cent, but sales in monetary terms were up eight per cent, and analysts raised their profit guidance for the full year.
All of this is cheering, but there is a bogeyman on the horizon who can’t be placated with a Magnum or two. Yes, inflation – which has already triggered prices for Unilever’s businesses going up 11 per cent.
Chief operating officer Graeme Pitkethly says consumers are currently happy to pay these higher prices, but there surely comes a time when people will swap their Ben & Jerry’s for Tesco Value vanilla. At that point, Unilever’s sales by volume will fall even further.
At first glance, Reckitt resembles a smaller Unilever. It is a brandbased business whose top brands include Dettol, Finish and Durex.
Yet, its shareholders have been cleaning up over the past 12 months, with a 20 per cent increase in the company’s share price.
Reckitt is a turnaround story. It struggled to digest baby formula brand Mead Johnson in 2017 and has since changed the management and financed a restructure. Last week’s results were creditable, though the Covid comparison makes it tricky to see the full picture. People are no longer spraying Dettol every five minutes, but they are buying more Nurofen and Strepsils as the virus becomes endemic.
The company has benefited from the US infant formula shortage – caused by a shutdown of a plant owned by rival Abbott. It is now feeding around half of American infants, a fact that accounts for some of the strength in its figures.
But analysts were encouraged that results were strong across the board, with Cedric Besnard, at CitiBank saying that the figures across all categories are ‘supporting the thesis of the company having finally completed a successful turnaround’.
The firm is facing the same inflationary headwinds as its rival but is tackling them slightly differently. Reckitt CFO Jeff Carr is focused on squeezing out savings from the company’s brands and believes there is still more left in the corporate toothpaste tube when it comes to efficiencies.
Despite Carr saying he is committed to ‘responsible’ prices, the company increased prices by 9.7 per cent in the three months to June.
MIDAS VERDICT: It is handy for investors that Reckitt and Unilever report in the same week. These two businesses in the same sector show how effectively management intervention can make a difference when companies are battered by the same economic storms.
Reckitt currently looks a better bet, as it is well run and streamlined, with a hunger to develop new brands to meet customer demand (laundry sanitiser is the latest innovation, as the energy crisis means people are washing clothes at lower temperatures).
Unilever is still sprawling and uncertain. It has already pushed up prices 11 per cent, raising the question of how much its customers will bear.
However, we also need to look at company valuations. With a yield of 4.3 per cent and a price earnings ratio of 18 times forecast earnings in 2022, Unilever trades on a 20 per cent discount to peers in the UK and overseas. The shares have fallen 3.6 per cent to £40.03 over 12 months.
Reckitt’s shares have risen more than 18 per cent to £66.46 over the same period. Its estimated dividend yield is 2.7 per cent for this financial year and its forward price earnings ratio per shares is 20 times earnings for 2022, meaning it is the more expensive choice.
Reckitt is a solid business, but with the possibility of intervention by Peltz pushing up Unilever’s shares, and a loyal customer base showing they are willing to pay higher prices, it may be worth opting for ice cream with Unilever tomorrow rather than jam today with Reckitt.
Traded on: Main market Ticker: ULVR Contact: unilever.com or 020 7822 5252
Traded on: Main market Ticker: RKT Contact: reckitt.com or (0)1753 506 800