The Motley Fool

As the Reckitt and Unilever share prices fall, I’d buy both

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Screen of price moves in the FTSE 100
Image source: Getty Images.

While the pandemic was a boon for hygiene product demand, it also led to input cost price inflation. That could eat into profits at consumer goods companies such as Reckitt (LSE: RKT) and rival Unilever (LSE: ULVR). With both the Reckitt and Unilever share prices falling over the past year, here I explain why I would consider buying them for my portfolio.

Reckitt: hoping for a turnaround

Reckitt is best known as the owner of brands such as Lysol and Dettol. Unsurprisingly, many of its brands turned in strong sales figures during the pandemic. While there’s a risk that future sales won’t be sustained at the same high level, I still feel the company’s broad portfolio of premium brands combined with global exposure make it an attractive share.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

So, why has the Reckitt share price tumbled 24% over the past year? In short, concerns remain about the future performance of the company’s infant nutrition business. This has underperformed since Reckitt acquired it in 2017. The expensive deal piled debt onto the Reckitt balance sheet. Last year it wrote off £5bn of the unit’s value. That is an accounting move so didn’t affect cash flow, but it did suggest that Reckitt had overpaid when buying the business.

Reckitt is exiting part of the business, by selling most of its stake in the China infant formula operation. While it may scar the company financially, I think that strategy shows that it’s moving forward and hopes to put its infant nutrition problems behind it.

The Unilever share price has fallen

Although Unilever hasn’t been wrestling with a problematic division like Reckitt has, the Surf and Ben & Jerry’s owner has also seen its stock deflate lately. Over the past 12 months, the Unilever share price has fallen 16%.

Reasons for the price fall include inconsistent sales growth and the impact of ingredient cost inflation. In the first half, underlying sales growth was 5.4%. That’s a creditable performance, though it masks a mixed picture. While developing markets turned in 8.3% growth, developed markets managed only 1.5%. Meanwhile, a decline in the company’s underlying operating margin suggests that cost pressures are already hurting the company’s profitability. If it can’t pass input cost rises onto consumers with price increases, there’s a risk that profits could fall further.

Long-term prospects

Both companies face headwinds. But I think they benefit from their global reach and owning premium brands, which gives them pricing power. That could help offset the cost inflation they face.

The tumbling share prices also mean that these consumer goods giants now offer dividend yields I consider attractive – 3% for Reckitt and 3.7% for Unilever. Risks remain though. Changing consumer preferences could lead to falling revenues, and any economic downturn may dent demand for premium products. That could hurt profits. But on the upside, both companies are a play on global economic recovery and continued demand growth in developing markets. That’s why I’m bullish on both.

My next move

I regard Reckitt and Unilever as well-run companies with good long-term business prospects. Their premium brands give them the sort of “economic moat” about which super-investor Warren Buffett speaks.

With both the Reckitt and Unilever share prices falling over the past year, I would consider adding these two companies to my portfolio.

Inflation Is Coming: 3 Shares To Try And Hedge Against Rising Prices

Make no mistake… inflation is coming.

Some people are running scared, but there’s one thing we believe we should avoid doing at all costs when inflation hits… and that’s doing nothing.

Money that just sits in the bank can often lose value each and every year. But to savvy savers and investors, where to consider putting their money is the million-dollar question.

That’s why we’ve put together a brand-new special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation…

…because no matter what the economy is doing, a savvy investor will want their money working for them, inflation or not!

Best of all, we’re giving this report away completely FREE today!

Simply click here, enter your email address, and we’ll send it to you right away.

Christopher Ruane has no position in any share mentioned. The Motley Fool UK has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.