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.
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.
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.
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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.