Unilever Plc (LSE:ULVR) shares have proven to be quite a nice refuge from the stock market correction in 2022. With inflation and rising interest rates taking many growth stocks for a ride, this premium consumer staple retailer’s share price has remained flat over the last 12 months. That’s notably ahead of the FTSE 100‘s 8% drop and seriously ahead of the FTSE 250‘s near-30% tumble!
Regardless of what the economy is doing, people still need food, beverages, and hygiene products. So, seeing Unilever be resistant to a lot of the volatility lately isn’t a surprise. But does that make it a good long-term investment?
Let’s take a closer look at this business and whether it belongs in my portfolio.
What does Unilever do?
The company is a multinational corporation selling consumer goods, including foods, beverages, cleaning agents, personal care and home care products based in the United Kingdom.
With more than 100 years of operations, Unilever has a presence in more than 190 countries, and almost 3.4 billion people use its products daily.
With more than 148,000 employees working for the company, Unilever proudly operates over 400 brands, the majority of which are household names today.
Some of its top brands are:
- Dove Soap
- Ben and Jerry’s
Unilever 2022 financials
While consumer staples are typically resistant to macroeconomic pressures, Unilever has still had to offset some adverse effects.
Most of its brands are considered premium products and therefore command a premium price. But as consumers look to save, many switch to cheaper brand alternatives. The end result is a drop in sales volume.
Fortunately for shareholders, the consumer goods giant also commands a fair amount of pricing power. So while sales volumes may have taken a hit, the impact on revenue was negligible after management raised prices.
Looking at the interim results for 2022, total turnover came in at €29.6bn – a 14.9% increase compared to a year ago. Needless to say, that’s good news for Unilever shares.
Upon closer inspection, 8.1% of this turnover growth rate came from increased product sales. However, 5.6% originated from favourable movements in foreign currency exchange rates. The latter isn’t really within management’s control and could reverse in the future, so I’m not putting much weight on it.
Product prices were boosted by 9.8% to offset the 1.6% decline in sales volumes during the first six months of the year. Yet despite this, margins still took a hit resulting in earnings per share (EPS) landing at €1.13 – a 4.7% decrease.
The more recent third-quarter results showed similar trends. Product prices have climbed by a further 12.5% to offset a 1.6% decline in sales volumes, pushing the total turnover up by 17.8%. But once again, favourable currency headwinds were responsible for 8.8% of this.
Regardless, the group continues to return a nice lump of capital to shareholders through dividends. And recently announced a €15.8bn payout for investors.
The performance of Unilever shares
Unilever is one of the largest companies listed on the London Stock Exchange with a market capitalisation of £97.5bn. Yet its large size hasn’t been entirely immune to volatility.
While its 12-month stock price performance might be ahead of the FTSE 100 index, there have been quite a few swings in valuation as investors judge its resilience to the economic environment.
Looking at its 52-week range, the share price has moved from as high as 4,178p to as low as 3,267.5p. And zooming out to a five-year perspective, the share price has actually tumbled by nearly 10%.
The actual return for shareholders has been higher courtesy of annual dividends. But there’s no denying that Unilever shares haven’t been delivering the best performance over the last half-decade.
That said, it’s worth pointing out that defensive stocks, like Unilever, tend to outperform during bear markets and underperform during bull markets. So, this lacklustre display might not necessarily mean the future performance of Unilever stock in 2022 and 2023 will meet the same fate.
In my experience, a company with such a long history of operations are often some of the strongest enterprises. After all, a business that’s still growing after a century must be doing something right.
Despite the reduction of sales in retail stores, the shift to e-commerce has been fruitful for consumer goods companies like Unilever. In fact, this has benefitted the company towards exploring new international markets like skincare in China.
Unilever’s long-established brands are demonstrating quite a bit of consumer loyalty. And that’s not surprising, considering it owns six of the top 20 global brands. What’s more, of the firm’s 400+ brands in its portfolio, over four-fifths are ranked number 1 or number 2 in their market.
Having a vast collection of globally recognised brands opens the door to pricing power. And that’s something the group’s recent results demonstrate perfectly.
Risks of investing in Unilever shares
Despite being a well-known household and personal products conglomerate, Unilever Plc is far from a risk-free enterprise.
As previously mentioned, even after exercising its pricing power, margins are still being pressured by inflation. While this is more of a short-term problem, it does put cash flow under strain. Meanwhile, management has been criticised multiple times for not focusing on potential and new consumer markets.
This could be an early sign of managerial complacency, which, in the long run, can create a lot of problems, creating opportunities for competitors to swoop in and steal market share.
The group also appears to be looped in a legal battle with its Ben & Jerry’s ice cream subsidiary. The latter is trying to block its parent company from selling its brand in Israel to a local licensee as it goes against the group’s political stance surrounding the occupied Palestinian territories.
Social justice aside, this undeniably creates a distraction for the leadership team that may not perform up to expectations as a consequence.
Should I buy Unilever shares today?
Unilever’s brands are some of the most well-known worldwide, with products found in almost every household.
Premium consumer staples are hardly the fastest-growing sector on the stock market. But the consistency of demand has enabled Unilever shares to increase shareholder dividends for more than 21 consecutive years. And at today’s share price, the dividend yield stands at a solid 3.7%. That’s quite impressive, in my opinion.
Therefore, personally, I believe the potential long-term income is worth the risk associated with such an investment. That’s why I’m considering adding this business to my portfolio when I have more capital at hand.
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Saima Naveed does not own shares in any of the companies mentioned in this article. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.