Unilever shares soar after results deliver positive surprise

Unilever is a strong performer paying an attractive dividend, and appetite for shares could lead to upgrades.

Unilever (LSE:ULVR) has identified some of the factors which have limited its prospects of late and is taking some large strides towards rectifying the situation.

More recently, sales growth has been tepid and fell marginally during this period. The need to reenergise sales is not only something which the company has recognised, but is something where Unilever has a historically strong record.

The move to a single structure should give the group more flexibility, while the constant evaluation of core products has resulted in a spin-off of the Tea business, as had been expected and which is likely to complete by the end of 2021.

There are also pockets of strength within the numbers, not least of which are the opportunities provided by the pandemic for the company to show its defensive qualities.

Home Care sales, while representing only 20% of turnover, grew by over 3% during the first half of 2020, with an increase in underlying operating margin of 1.3%, as consumers flocked to cleaning and sanitising products.

By region, sales growth in the important North American region (the Americas account for 32% of turnover) jumped by 7.3%, while across Asia there has been something of a return to form after the likes of China eases its way towards economic recovery.

At a group level, this has translated to an impressive growth in the earnings per share metric of 6.4%, operating profit up 3.8% and net profit up 10.4% year-on-year.

Operating margin, which provides Unilever with a competitive cushion, remains just shy of 20% and a reduction in capital expenditure was among the reasons that its free cash flow spiked to nearly three billion euros.

An increase of 49% in online sales picked up some of the slack caused by the lockdown, and Unilever now expects to ramp up marketing spend in the second half of the year as conditions allow.

The company also remains a dependable dividend source, with a yield of 3.3% at present representing an increasingly rare opportunity for income-seeking investors.

At the same time, there are competitive elements at play which are outside of the company’s control, not least of which is the tendency over recent years for retailers to be selling their cheaper, own brand products in this fierce land grab for consumers.

Meanwhile, even prior to the pandemic, there had been some pressure on the Emerging Markets business, which represents nearly 60% of sales, and a decrease of 1.9% in this period is meaningful. The pandemic has unsurprisingly had a material impact on sales of out-of-home ice cream and, in particular, its Food service offering.

Overall, Unilever’s strong performance and the period and an increasingly focused strategy has led to a sigh of overdue relief from investors.

This may also help to simplify what has been a complicated performance of the shares, as expectations have not been met in the recent past.

The shares remain down some 8% over the last year, as compared to a decline of 18% for the wider FTSE 100 index, but today’s spike has underlined the company’s resilience.

The shares are currently ahead by 6% in the year to date and, if measured from the March lows, up 24%. 

The market consensus of the shares has recently dipped to a 'hold' following the disappointment of the quarterly update, but renewed vigour from the company and appetite for the shares could well lead to upgrades in the following days.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.