Steady progress at Unilever but consumers pay high price

The FTSE 100 giant has such pricing power that it was able to pass on higher costs to shoppers last year. Our head markets explains what these annual results mean.

Unilever (LSE:ULVR) can usually be relied upon to provide steady growth without shooting the lights out and, despite a tough inflationary environment, has again played to form.

The incoming CEO may have set his sights on revitalising business performance, but in the meantime Unilever continues to play to its strengths in a reliable manner. The sheer pricing power of the group’s portfolio of household brands enables a good proportion of costs to be passed onto consumers, without overly affecting volumes.

Indeed, Unilever’s “billion plus euro brands”, which account for over half of group sales, saw underlying sales growth of 10.9%, with particularly strong showings from the likes of OMO, Hellman’s and Magnum.

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Underlying sales growth for the group in 2022 as a whole mirrored the entrenched strategy. The figure of 9% included price growth of 11.3%, offset by volume declines of 2.1%. The Home Care unit was a standout performer, adding 11.8% of underlying growth, while the benefits of geographical diversification also played a part, with Emerging Markets and Latin America up by 11.2% and 20.4% respectively.

Not all of the inflationary pressures were passed on, however, with a resultant decline of 2.3% in underlying operating margin, and with underlying operating profit growing by just 0.5%. The net profit line was rather more pleasing, with a number of €7.6 billion comparing with expectations of €6.5 billion.

Looking ahead, Unilever expects further cost inflation this year (and therefore high underlying price growth, partially offset by lower volumes once more) and continues to target cost savings of €600 million, most of which should feed through this year. The cash generation has also enabled net debt to have been reduced slightly, falling to €23.7 billion from a previous €25.5 billion.

The group also recognises the importance of keeping its brands in the mind of consumers, despite price increases which run the risk of alienating cost-conscious shoppers, and has invested an additional €500 million in brand and marketing investment. At the same time, the dividend was maintained, leaving a perfectly respectable yield of 3.7% in place.

The next stage of the company’s growth, should the new CEO achieve the aims, will take some time to filter through. Meanwhile, the economic backdrop continues to raise questions on the attractions of the group’s products, and while the reported €50 billion bid for GSK (LSE:GSK)’s consumer healthcare business failed and is now consigned to the history books, the fact that Unilever even considered such a move has left a slightly sour taste in the mouths of some investors.

Indeed, the shares are currently trading at a discount to historical valuations, although over the last year the price has delivered a marginal outperformance, having risen by 6% as compared to a gain of 3.2% for the wider FTSE100.

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The jury will be out for some time as to whether the management change at the top will reap the required benefits, such that in the meantime the shares remain regarded as a solid defensive play with limited high growth prospects. As such, the market consensus of the shares as a 'hold' is likely to remain in place for now.