I always thought the weakest parts of household goods giants Unilever (LSE: ULVR) and Reckitt Benckiser Group (LSE: RB) were their food divisions. Now it seems the high-ups agree with me, because they are preparing to reduce company exposure to this sector as a part of a wider overhaul. I reckon this is good news for investors and offers an even tastier reason to buy two of my favourite FTSE 100 stocks.
Food, not so glorious food
So why am I so down on food? It is one of life’s essentials, even more than the companies’ household cleaning sprays, and health and beauty products. But as I have written before, many of their products look dated. There is a growing fresh food revolution in the developed world, and their tinned and jarred processed offerings are on the wrong side of it.
Reckitt’s offerings include French’s Ketchup and Classic Yellow mustard, and Frank’s Red Hot sauces and onion flavourings. They bring in less than 4% of total revenues, and frankly, I am surprised it is as much as that. They pale alongside the company’s other Powerbrands, which include kitchen and bathroom stalwarts such as Air Wick, Cillit Bang, Dettol, Durex, Harpic, Lemsip, Nurofen, Scholl, Strepsils and Vanish.
Unilever has a far more impressive serving, including Knorr, Lipton, Hellmann’s, Colman’s, Bovril, Pot Noodle, Blue Band and pourable artificial cream Elmlea, to name but a few. Yet many aren’t exactly cutting-edge brands, or the healthiest either. Maybe I’m a food snob and I am sure they sell well, but they do seem vulnerable to changing consumer tastes.
Unilever is holding onto those brands while taking the knife to its spreads division, which includes Flora, Stork, Country Crock and other slow-growth brands. That looks like a wise move to me. Public taste for home and personal care brands is unlikely to undergo any major shift (Brylcreem notwithstanding), but global consumers are likely to be washing their clothes, hair, teeth, kitchens, bathrooms and children in the likes of Comfort, Domestos, Dove, Lifebuoy, Lux, Matey, Omo, Pears, Signal and Sunsilk for decades to come.
Reckitt wants to sell its £2.3bn food arm to cut debt after its mega purchase of infant formula maker Mead Johnson. Company growth has slowed lately, with Q4 like-for-like sales up just 1%, and offloading a non-core division cuts the mustard, quite literally.
Unilever is looking to reshape its business following the misfired £115bn takeover attempt by US giant Kraft Heinz, and has also hiked its cost savings target from €4bn to €6bn. Wisely, it has no plans to sell Ben & Jerry’s, Magnum, Marmite and PG Tips, which still merit shelf space in my house.
Price is right
Reckitt is up an impressive 111% over five years, with Unilever rising 92% over the same period. Both look expensive, trading at 23.64 and 25.47 times earnings respectively, and yielding 2.11% and 2.74%. But they have shown before they are worth a premium price. Emboldened by recent news, I would buy them at the first dip.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser. 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.