No quick fix for Unilever

These are solid annual results from the consumer goods giant, but the outlook contains elements of both hope and caution. Our head of markets explains the implications.

Unilever (LSE:ULVR) is at an inflection point in terms of strategy and these results underline the strong base from which the company can plot the new course.

After the failure of the bid for GlaxoSmithKline's (LSE:GSK) consumer healthcare business, Unilever has decided against any major acquisitions for the foreseeable future. At the same time, the organisational restructure will result in a focus on category-led units, and is expected to result in cost savings of €600 million over two years, while the sale of the Tea business for €4.5 billion will add further fuel to the fire when the deal completes in the second half of this year.

In turn, this release of capital has enabled the company to announce a further share buyback programme over 2022-2023 of €3 billion, the same amount as the one completed in 2021. It has also resulted in an increase to the dividend, where the prospective yield of around 4% remains a staple part of the investment case for potential shareholders.

• The outlook for FTSE 100 laggards Vodafone and Unilever
• Terry Smith and analysts let rip at Unilever
• ii view: big decision for Unilever after failed Glaxo healthcare bids

As with many other companies across various sectors, the spectre of high input cost inflation has been a major challenge for Unilever, with commodity, freight and packaging costs providing a headwind. However, the company has been able partly to mitigate this pressure by passing on some of these costs to consumers and expects to continue to do so, despite an inevitable impact on volumes.

Of the underlying sales growth seen in the year of 4.5%, 2.9% of the increase was due to pricing and the balance of 1.5% to volumes, highlighting the company’s ability to benefit from pricing power.

There are also signs of recovering growth geographically, with strong performances in the likes of China and India, a creditable performance from the US, although growth in Europe remains lacklustre. The company is also reflecting the changing nature of doing business with further focus on its e-commerce channel, where growth of 44% has led to the channel now accounting for 13% of total group sales.

The metrics on the whole have beaten expectations comfortably and suggest that there is much to go for in Unilever’s brand new world. Operating margin increased and now stands in excess of 16%, revenues rose by over 3% and net profit by 9%, all of which were higher than expected. Less positively, net debt rose due to lower free cash flow, the previous buyback programme and a couple of bolt-on acquisitions.

• 10 shares to give you a £10,000 annual income in 2022
• 27 dividend stocks for income seekers in 2022
• Watch our share tips here and subscribe to the ii YouTube channel for free
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

The company’s outlook for the year contains elements of both hope and caution. The pressure on margins is likely to persist as cost inflation continues for the time being, although once more strong pricing action should lead to further underlying sales growth of between 4.5% and 6.5%.

Unilever has been under much scrutiny of late, partly as a result of what has increasingly been seen as doddering progress. The share price has suffered as a result, having dipped by 3% over the last year, as compared to a gain of 17% for the wider FTSE100 and now stands down by 18.5% over the last two years.

The general view of the shares is for the moment undecided, with the market consensus of the shares being a "hold", albeit a strong one. It remains to be seen whether Unilever’s fresh ambitions will result in generally improved sentiment towards the shares, although the initial reaction to the numbers is underwhelming as it is clear that there is no quick fix despite the proposed measures.