Unilever shares at three-month low after interim results

Costs are volatile as economies emerge from lockdown restrictions which is having an adverse impact on operating margins. 

Unilever (LSE:ULVR) is a trading colossus, so changes to its fortunes tend to be incremental rather than momentous.

The group, which is home to a vast array of household brands, has had mixed results over the last year as different economies recover at different speeds as they attempt finally to escape the clutches of the pandemic. In addition, changes in consumer behaviour have differing impacts on its products, which are a mix of household and out-of-home lines.

By geography, the Americas (31% of sales) and Europe (22%) have come up against tough comparatives versus last year, while the Asian/African/Russian regions (47% of sales) have been affected by renewed restrictions in India and Indonesia, with the situation in China continuing to normalise.

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Underlying sales growth for the first half of its financial year has been positive across the board by product, however. Beauty and care rose by 3.3% in the six months to 30 June, partly propelled by the easing of some restrictions, while Home Care added 4.5%. The Food & Refreshment line continues to reap the benefit of having feet in both camps of the pandemic situation and grew by 8.1% over the period.

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Promisingly, these gains were driven by a strong mixture of constituents, with the overall growth figure of 5.4% comprising around 4% by volume and 1.3% by price. The growth also exceeds the company’s ongoing target of 3% to 5% growth, with the outlook predicting that the range should comfortably be met for the full year.

In a slight streamlining of its operations, the majority of the tea and certain of its smaller beauty and care brands are being separated, which will enable further focus on its key areas. Underlying operating margin, while 1% shy of last year’s figure due to brand investment and inflationary input costs, nonetheless remains extremely healthy at 18.8% and adds to the prolific levels of cash which the group generates.

As such, a dividend which provides a healthy yield of 3.4% remains a comfortable expense, as does a proposed €3 billion share buyback programme, which is now underway. 

An increase in raw material, packaging and distribution costs is an unwelcome development given the differing speeds of global economic recovery, and the overall pre-tax profit number has slipped by 3.6% due to a combination of cost and comparison factors.

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The progress which Unilever had been making during the pandemic has to some extent been undone by these pressures, and over the last year the shares have dipped by 1%, as compared to a rise of 12.7% for the wider FTSE100 index. Market consensus for the stock has also cooled, although the general view of the shares as a 'cautious buy' still reflects the power of the group and its undoubtedly defensive nature, given the diversity of its products and geographies.