Rising inflation, inverting yield curves, and increased energy prices are all sparking fears that consumer spending might be about to contract. Here’s why the Unilever (LSE:ULVR) share price might be attractive with recession fears rising.
Things people use
Unilever is one of the 10 companies that control everything that we buy. These companies make things like food, cleaning products, and toiletries.
An increased cost of living might force consumers to spend less on things that they can do without. But while this might be bad news for companies that sell holidays and cars, it’s less likely that we’ll make significant cutbacks in things like food and toothpaste.
In order to see why I think the Unilever share price might be attractive with a recession on the horizon, let’s compare it to two of the other companies that control everything that we buy: Kellogg (NYSE:K) and The Kraft-Heinz Company (NYSE:KHC).
Brand power
Each of these companies draws strength from its portfolio of well-known brands. Strong brands allow businesses to charge a premium for their products. That should result in higher operating margins. So in order to evaluate brand strength, let’s see how Unilever’s operating margin have compared with operating margins at Kellogg and Kraft-Heinz over the last four years.
| Operating Margin | 2021 | 2020 | 2019 | 2018 |
|---|---|---|---|---|
| Unilever | 18.4% | 18.5% | 16.8% | 24.6% |
| Kellogg | 12.4% | 12.8% | 10.3% | 12.6% |
| Kraft-Heinz | 19.6% | 21.1% | 19.9% | 21.8% |
As we can see, Unilever’s operating margin is consistently the highest of the group. That indicates to me that it’s able to charge a premium price for its products.
Debt
Unilever, Kellogg, and Kraft-Heinz all carry significant amounts of debt. Paying interest on debt can obstruct a company’s ability to make money for its shareholders. We can assess Unilever relative to its rivals here by comparing each companies interest expense — the amount of interest the company pays on its debt — with the company’s operating income. The results are as follows:
| Operating Income | Interest Expense | Interest as % of Operating Income | |
|---|---|---|---|
| Unilever (€) | 8,702,000 | 491,000 | 5.64% |
| Kellogg ($) | 1,752,000 | 223,000 | 12.73% |
| Kraft-Heinz ($) | 5,094,000 | 2,047,000 | 40.18% |
Of the three, Unilever pays the smallest amount of its operating income out as interest on its debt. This is a good thing. It should give the company greater financial flexibility and give it better opportunities to adapt its business in the future.
Conclusion
Unilever seems to be able to use its strong brand portfolio more effectively than its rivals and it also has the interest payments on its debt well under control. Investing in Unilever comes with risk as the company attempts to restructure its product lineup in pursuit of growth. And I wouldn’t expect Unilever shares to be entirely immune from a general movement downwards in the stock market. But if I were looking to buy shares in a consumer products company to protect myself from an upcoming recession, I’d be looking at the Unilever share price as a buying opportunity today.
