Unilever tries to win back investors' trust

Unilever (ULVR) was badly stung by its failed £50bn attempt to acquire a joint-venture (JV) consumer healthcare business from GlaxoSmithKline (GSK) and Pfizer (US:PFE). Despite the announcement of a €3bn (£2.49bn) share buyback programme, and positive news on sales growth in the consumer goods group’s full-year results, investors don’t seem to have been calmed after the JV debacle and the shares were down by over 3 per cent as the results were chewed over by the market.

Criticism of the acquisition attempt, which amounted to three rebuffed proposals, included censure from Unilever’s major fund management shareholder Fundsmith. In a letter to their investors, the manager’s chief executive Terry Smith and head of research Julian Robins described Unilever's move as a “near-death experience” for their stake.

Unilever’s management seems to have taken such feeling on board. It was announcement last month that around 1,500 jobs will be cut at the group as part of a structural overhaul. Chief executive Alan Jope, meanwhile, said that the company “does not intend to pursue major acquisitions in the foreseeable future”.

Instead, Unilever will splash out cash on another €3bn of share buybacks. This will be implemented over the next two years and comes after the same amount was spent buying back shares in 2021.

The fundamental results for the year were broadly mixed. Underlying sales growth of 4.5 per cent was the highest increase for 9 years. The foods and refreshment division was the standout, with growth of 5.6 per cent taking its sales to €20bn. Just under half of the group’s total revenues came from its non-American and non-European markets, with double digit growth in India, China, and Turkey.  

However, the overall margin was hit by higher input costs and the outlook for this year looks challenging. The group’s underlying operating margin was down by 10 basis points to 18.4 per cent. Management expects “very high input cost inflation” in the first half of 2022, with the underlying margin to be hit by between 140 and 240 basis points for the full year.

Consensus forecasts give EPS of 224p and 233p for the 2022 and 2023 financial years. Unilever is trading at a forward price to earnings ratio of 17 times – this looks like good value against a competitor such as Procter & Gamble (US:PG), which is up at 26 times. While the margin outlook isn't cheery, underlying sales growth of 4.5 to 6.5 per cent is expected for 2022. Hold.

Last IC view: Hold, 4,066p, 22 Jul 2021