ii view: Unilever keeps profit guidance on track

Cost inflation is strong, but price rises are countering and sales beat forecasts. We assess prospects. 

Third-quarter trading update to 30 September

• Adjusted or underlying sales up 2.5%
• Quarterly dividend of €0.4268 or £0.3598 per share
• Expects to deliver full-year profit margin in line with its previous estimate

Chief executive Alan Jope said:

"We have delivered a good quarter against strong comparators. The combination of our strategic choices and focus on operational excellence continue to drive competitive growth.

“Cost inflation remains at strongly elevated levels, and this will continue into next year. We have and will continue to respond across our categories and markets, taking appropriate pricing action and implementing a range of productivity measures to offset increased costs.”

ii round-up:

Consumer goods giant Unilever (LSE:ULVR) today reported third-quarter underlying sales growth of 2.5%, with year-to-date growth of 4.4%.

However, while detail regarding top-line trends is of interest, the real focus for investors is on margins and input cost guidance. As such, management reassurance that it expects to generate profit margins in line with its own guidance of around flat for the full year comes as a major relief.

Unilever shares rose by more than 2% in UK trading. Shares for rivals Nestle (SIX:NESN) and Danone (EURONEXT:BN)are also both little changed week-to-date following recent trading updates. 

Unilever's 2.5% gain in underlying sales for the quarter is marginally ahead of analyst forecasts, although pricing as opposed to volume gains has been the key driver. The pandemic continues to impact business, especially in Southeast Asia which is central to the fall in volumes. 

More broadly, Unilever remains busy rejigging its portfolio of businesses into higher growth arenas. It’s already sold its out-of-favour tea business and bought digitally-native skin care brand Paula's Choice. 

ii view:

Sales for consumer goods giant Unilever are split almost equally between Beauty & Personal Care and Foods & Refreshment at around 40% each. Home care accounts for the balance. Its approximate 400 brands include Dove, Sunsilk, Comfort, Knorr and Domestos. Its products are available in around 190 countries.

Declining product volumes and rising costs will worry investors, and economic uncertainty given the rising cost of living could put pressure on consumers to trade down from Unilever’s premium brands. Unilever shares have retreated 13% year-to-date compared to a gain of close to 12% for the wider FTSE 100 index. 

On the upside, a historic and forecast dividend yield of over 3.5% is not to be dismissed in the current ultra-low interest rate environment, and an ongoing share buyback programme of up to €3 billion offers support. In all, and while worries for pressured profit margins and rising costs persist, a 15% discount to the wider European stables sector arguably prices in current headwind concerns.  

Positives: 

• Provides diversity in both product type and geographical location
• Defensive qualities in uncertain times

Negatives:

• Rising cost pressures
• Discount retailers often only stock their own branded labels

The average rating of stock market analysts:

Strong hold