Earnings: why Unilever shares just keep on going

i rank Unilever (LSE: ULVR) shows among the most resistant in the FTSE 100. Over five years, we have seen an increase of 9%, although it is quite modest. But not much damage from Covid. And the dividend remains strong.

Unilever has just delivered solid 2022 progress. Reported turnover rose 14.5%, with underlying sales up 9%. Basic earnings per share were down slightly, at 2.1%. Free cash flow fell, but still came in at €5.2bn.

Unilever raised €1.5 billion by way of share buybacks, and paid dividends amounting to €4.3 billion. If you look up the definition of ‘cash cow’ in a financial dictionary, I wouldn’t be surprised if it just says ‘Unilever’.

billion + brands

The company has strengthened its focus on what it calls billion + euro brands. He was a great seller, including his favorite ones OMG, Hellmann’s, rexona, Sunsilkand Magnum. Billion + brands accounted for 53% of turnover, and generated sales growth of 10.9%.

In the words of chief executive Alan Jope, the board has also “Prioritize brand improvement and marketing investment“. That has come, so far, at an additional cost of €0.5bn.

The reaction

The first reaction to this headline move was positive. Earnings may drop slightly. But considering what Jope called “high input cost inflation“, I think this is an impressive performance.

This highlights again, the competitive advantage enjoyed by companies like Unilever. It has brand power. And it has the purchasing power that comes with spending big. That means it can suffer less than smaller competitors.

Couple that with the important nature of the product, and I think Unilever should be one of the safest investments in the UK stock market.

Cost savings

Looking forward, the update says “From 1 July 2022, a simpler and category-focused operating model for Unilever is in place, organized around five Business Groups and a technology backbone, Unilever Business Operations. We are on track to deliver the new structure within the existing restructuring plan, and generate approximately €600 million in cost savings in the first two years after 1 July 2022, with the majority in 2023“.

Forecasters expect Unilever to continue generating cash and paying dividends. They show a yield of about 3.6% increasing to 4% in the next few years. Forecasts are often unreliable. But in the case of companies that show long-term stability, I think it will be close.

Verdict

I speak well of Unilever here, but not without risk. The main thing I see in the short term is from inflation and recession. The company has reported an increase in input costs. But I fear that we can only see the beginning, and we could have a difficult 2023. So I suspect that Unilever shares could have a few years of stagnation.

We are looking at very high valuations, with price-to-earnings (P/E) multiples of around 20. In difficult economic times, investors can argue. However, I still rate Unilever as a potential buy for long-term value investors.