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Is now the time to think about investing in consumer goods?

We look at what the recent changes in valuation of Unilever and Reckitt Benckiser shares could mean for investors.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Consumer goods giants have a lot of attractive qualities. As producers and suppliers of the world's most popular everyday items, from bleach to condiments, some level of revenue is pretty much guaranteed. That's a real asset, especially in today's uncertain market. We admire high-quality businesses with access to resilient end markets. But the catch is, investors have to pay for the privilege.

Two of the big players in the consumer world, Unilever and Reckitt Benckiser have caught our attention lately. Looking at the share price compared to predicted profits, their valuations have come down some way.

But does this mean it's time to invest? There's a lot more to consider than the price tag.

This article is not personal advice. If you're not sure if an investment is right for you, please speak to a financial adviser. All investments rise and fall in value, so you could get back less than you invest. Past performance is not a guide to the future.

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Unilever – tankers take time to turn

We'll start with a biggie. Unilever's products are available in over 190 countries, and 2.5bn people use a product from one of its 400 household-name brands every day. We have Unilever to thank for everything from Marmite to Domestos.

Unilever's significance to global supply chains can't be understated. That brings us to the question of valuation – at 18.1 times expected profits, the price to earnings ratio is slightly lower than the ten-year average.

Now, that's not to say it's a lowly valued company. But Unilever's exposure to those resilient ‘everyday spending' sectors could be something worth paying for. That revenue stream also underpins a prospective dividend yield of 3.7%. Remember though, no dividend is guaranteed and yields are not a reliable indicator of future income.

There are real opportunities for growth too. 58% of Unilever's EUR51bn annual turnover comes from emerging markets. As these nations become wealthier and households spend more on branded products, Unilever's in a good position to benefit.

The recent unification to become single-listed on the London Stock Exchange is also a big step in the right direction. A simpler legal structure makes getting rid of underperforming businesses, or buying promising new ones, much easier. The lacklustre tea business is the first out the door – and there will be others.

This new structure is important because sales are sluggish. Underlying sales growth (USG) was 1.9% last year, as the pandemic caused disruption to out-of-home eating. And USG has averaged 2.9% over the last five years. This will give Unilever a leaner foundation from which to rejuvenate growth.

Chart showing Unilever's breakdown of turnover in 2020

Scroll across to see the full chart.

Source: Unilever 2020 Annual Report.

The biggest drawback of Unilever is exciting levels of growth aren't likely for a while. Getting a tanker of this size to turnaround takes a long time, and there's always the risk of not getting it right. These concerns are, we think, a large reason why the market isn't overly enthralled by Unilever at the moment.

But we think this sprawling giant is a force to be reckoned with – and exposure to diverse and resilient end markets shouldn't be sniffed at. Keep in mind though – the medium term is hard to predict in the current climate, so investors need to take a long-term view.

See the latest Unilever share price, charts and how to trade

Reckitt Benckiser – cleaning cupboard staple

We'll be the first to admit our opinion of Reckitt underwent a serious polish in the last year. We were once unimpressed by sluggish performance and what felt like an unclear strategy.

But heightened hygiene awareness looks here to stay, courtesy of the pandemic. As the company that makes Lysol and Dettol, that's a handy tailwind.

On an operational level, the pandemic has driven a huge increase in volumes, so revenue uplifts haven't been reliant on price increases. A volume-led approach is a method we prefer.

Higher volumes create efficiencies of scale which help margins and profits. Last year, Reckitt's Hygiene division, which includes Lysol, saw volumes rise a whopping 17.7%, and Hygiene underlying operating profit lifted 21.3% to £1.5bn.

Chart showing Reckitt Benckiser's split of revenue growth

Scroll across to see the full chart.

Source: Reckitt Benckiser 2020 Full Year Results.

Reckitt's also making genuine headway on sharpening its supply chains and stock availability. Having the right stock, on the right shelves, at the right time, are important ducks to get in a row if you want to grow over the long term. Improvements here are also helping free cash flow, which in turn helps lower debt – which at 2.4 times earnings, is higher than we'd like.

Given these strengths, it's interesting that the price to earnings ratio of 19.5 is lower than it's been in a while, and has come down some way since the peak of the crisis. On a ten-year basis, it's slightly higher than the average.

Some of that is likely coming from the remaining challenges. For all the boosts provided by pandemic sales, Reckitt's still chewing through issues thrown up by the Infant Child Nutrition business.

The division cost almost £1bn in impairment charges last year, as the value of its assets were revalued downwards. Again. Lower birth rates are going to hinder performance further in the coming year. We welcome the strategic review of the division's Chinese business. Frankly, it's a chain around Reckitt's ankles.

It's the reason sales are going to be held back to 0-2% growth next year.

Like some of its peers, Reckitt's undergoing a major restructuring programme. £2bn's being pumped into sharpening and streamlining its offering, which includes disposing of some brands and buying others that better “fit” the portfolio. This is the right idea – but as with any major change, it's not without risk.

Covid has triggered a long-term increase in demand for trusted health and hygiene products. That should feed into reliable revenue streams for this consumer giant, although there are no guarantees.

We're impressed by the work being done, and Reckitt could offer opportunity for those prepared to stomach some ups and downs. And a prospective yield of 2.9% means investors are being paid for their patience. No dividend is ever guaranteed though and yields are not a reliable indicator of future income.

See the latest Reckitt Benckiser share price, charts and how to trade

What's going on in the sector?

Something both giants are dealing with is the insurgence of smaller companies, with greater digital flexibility. The rise of digital brands has increased massively during the pandemic too – and that shift will be here to stay.

Digital marketing undercuts the potency of traditional ad campaigns (TV ads, billboards etc), which the likes of Reckitt and Unilever have traditionally relied on. Brand power and loyalty supports increased prices and helps boost margins. Some of the extra profit is then reinvested in next year's marketing budget, keeping the virtuous circle spinning.

If a customer base becomes less loyal – tempted by the digital disruptors, who can personalise who they target – that puts the whole cycle under pressure. We're definitely not saying the billions of pounds of revenue these giants make is under threat – their footprints won't be rubbed out that easily.

But it's something to consider for the long term. As we move to becoming a more digital society, what proportion of consumers will be insisting on their washing up liquid being Fairy? We suspect it'll be a smaller one. The way a product looks on a physical shelf plays a big part in traditional marketing.

Our verdict

These consumer giants boast what should be reliable, if a little unexciting, revenue streams. They're not investments for those seeking exciting growth. Unexciting doesn't mean bad, though. In the world of investing, exposure to the literal, and metaphorical, bread and butter of the world's produce isn't to be sniffed at.

Investing in individual companies isn't right for everyone. You should make sure you understand the companies you're investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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