Could Unilever shares be inflation-proof?

Unilever shares were given a small boost yesterday and today from its positive third-quarter update, but are the shares a good long-term buy?

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Unilever shares rose a little yesterday (and are up a little more today) on the back of results that showed underlying sales growth of 2.5% in the third quarter. One of the central themes of its update was inflationary pressures.

Finance chief Graeme Pitkethly predicted there would be little let-up in such pressures. On a call yesterday he said: “We expect inflation could be higher next year than this year“, adding that it was likely to peak in the first half of 2022 and to moderate thereafter.

The good and the bad

Overall, Unilever was able to raise prices. This is, in my opinion, vital if inflation is to persist as the FMCG company predicts. Unilever is doing well in its key markets with good growth in the last quarter in the US, China and India. Emerging markets are important to Unilever’s overall ability to grow so this is a really positive update.

E-commerce is also growing quickly. It grew 38% over last year and now makes up 12% of sales. That means there’s still plenty of runway left to keep growing online sales. The added benefit of going direct to consumer is it tends to be more profitable than selling through other channels.

All three divisions of Unilever saw modest sales growth, so if that trend continues it should help the shares.

Yet investors don’t seem to like Unilever shares much. Over 12 months the share price is down 18%. Fears over sluggish growth remain and Unilever hasn’t disposed of its tea business yet either. The shares aren’t particularly cheap given the low growth it’s achieving.

Also, if prices do rise there’s the ‘Lidl effect’ to take into account. Will consumers go for much cheaper own-brand products – especially in the home care division – if prices rise? Are consumers particularly loyal to a brand of bleach or dishwasher tablets? Possibly not.

The price rises Unilever achieved this quarter may not be sustainable. And any hint of reduced margins could well hit the share price hard.

Is it worth buying?

Graham Smith at Fidelity said: “The Unilever share price doesn’t look cheap, trading on about 22 times earnings (16 times for the MSCI UK Consumer Staples Index), but the shares do have an attractive historic yield of 3.9%. Cost pressures are likely to continue to weigh in the short term, but longer-term growth, especially in emerging markets, remains a good reason to keep the faith.

As noted, emerging market growth is very important for Unilever. I also think it’s worth bearing in mind that FMCG companies are popular with investors like Nick Train who holds the company and has a great long-term investing record. Unilever is the third-biggest holding in the Lindsell Train Global Equity Fund.

My belief is that these results show Unilever could be a top stock for my portfolio if inflation persists. But that does need to be balanced against sluggish growth and the threat that Unilever may struggle to raise prices. I’ll keep an eye on the shares, but won’t rush to add them to my basket.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Andy Ross owns no 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.

More on Investing Articles

Happy couple showing relief at news
Investing Articles

3 passive income strategies I like to try to double the State Pension with just £100 a month

Investing consistently, with diligence, and patience can lead to an impressive stock market income that puts the State Pension to…

Read more »

ISA Individual Savings Account
Investing Articles

£20,000 invested in a Stocks and Shares ISA 10 years ago could now be worth…

Stocks and Shares ISA investors have earned tremendous returns in the last decade, but just how much money has been…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

An 11.5% yield?! Here’s the dividend forecast for a hot income stock

This steadily recovering income stock has the highest dividend yield in the FTSE 250, which looks like it’s here to…

Read more »

Dominos delivery man on skateboard holding pizza boxes
Investing Articles

At 10p, is this penny stock a screaming buy?

This penny stock's growing rapidly, is debt-free, and is about to almost double its store footprint! Could it be on…

Read more »

Mature people enjoying time together during road trip
Investing Articles

How to take an empty ISA and transform it into a potential £50,000 second income

A key requirement of reaching financial freedom is earning a second income. And the stock market provides a way to…

Read more »

Man hanging in the balance over a log at seaside in Scotland
Investing Articles

How much do you need to invest in the stock market to quit work and live off dividends?

Quitting a nine-to-five job and living off dividends from the stock market sounds like a pie-in-the-sky idea to many. But…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

Prediction: this UK share could outperform Rolls-Royce between now and 2030!

Rolls-Royce has been on a phenomenal run, but over the next five years, another aerospace business could potentially deliver far…

Read more »

Illustration of flames over a black background
Investing Articles

With a 6.4% yield and 25 years of payout growth, is it a no-brainer to consider buying this dividend stock?

Our writer looks at the prospects of this remarkable dividend stock that’s increased its payout for 25 successive years and…

Read more »