Sparkle: Unilever, which makes Cif household cleaner, has loyal customers willing to pay higher prices

MIDAS SHARE TIPS: Clean with Reckitt and Unilever

Week after week, the cost of living crisis is driving up the prices of everyday items like shower gel and washing up liquid.

Homewares giants Unilever and Reckitt both told a story of price inflation when they reported results last week, but also raised earnings forecasts, suggesting sales remain strong even as stock markets customers become lighter.

Many analysts are fans of the stocks, citing their beloved brands as strong and trustworthy.

They also praise a history of successful turnarounds at Reckitt, as well as entrenched positions in emerging markets and high margins at Unilever. Both companies also pay good dividends.

Sparkle: Unilever, which makes Cif household cleaner, has loyal customers willing to pay higher prices

But there’s a big question mark over the next few years for both companies as we all grapple with rising bills.

It is naturally tempting to buy a clean brand kitchen cleaner rather than a more expensive bottle such as Cif when prices rise.

Indeed, it will be fascinating to see how shoppers react to Marmite, made by Unilever, which costs 11% more.

Meanwhile, as the wave of inflation continues to rock us, is Reckitt, maker of Durex, the protection your wallet needs or, as maker of Gaviscon, will it also give indigestion to your investments?

Unilever

Consider first Unilever, the former Anglo-Dutch conglomerate that became all-British in 2020 as part of a simplification of its shareholder structure.

The company may have streamlined from a business perspective, but it’s still a global tangle of 400 brands, the strongest being Dove, Lifebuoy and Knorr.

And juggling responsibilities has been far from easy for management. The company’s share price has lagged the market since 2017, when it rejected an offer for rival Kraft.

In January, Unilever made its own bid for the consumer business of pharmaceutical giant GlaxoSmithKline. This failed and the Sensodyne, Aquafresh and Chapstick businesses have now been spun off from GSK as Haleon.

Veteran investor Terry Smith didn’t mince words on the episode, describing it as a “near-death experience” for Unilever and suggesting management should walk away.

Smith – a major shareholder in Unilever, via the investment fund Fundsmith Equity – is not the only investor whose management should be concerned. In May, activist shareholder Nelson Peltz joined the board, hinting that he would disrupt operations and possibly force a breakup, as he has done with other companies.

As a result, the company had a lot to prove with last week’s first-half numbers. He delivered – up to a point. The company reported a 1.6% drop in sales volume, but sales in monetary terms rose 8% and analysts raised their full-year profit forecast.

All of this is encouraging, but there’s a bogeyman on the horizon that can’t be appeased with a Magnum or two. Yes, inflation – which has already driven up the prices of Unilever’s business by 11%.

COO Graeme Pitkethly says consumers are currently happy to pay these higher prices, but there is sure to come a time when people will swap their Ben & Jerry’s for Tesco Value vanilla. At this point, Unilever’s volume sales will fall even further.

Reckitt

At first glance, Reckitt looks like a smaller Unilever. It is a brand-based company whose main brands include Dettol, Finish and Durex.

Yet its shareholders have cleaned up over the past 12 months, with the company’s share price rising 20%.

Reckitt is a story of turnaround. He struggled to digest formula brand Mead Johnson in 2017 and has since changed management and funded a restructuring.

Last week’s results were decent, although the Covid comparison makes it hard to see the full picture. People are no longer spraying Dettol every five minutes, but they are buying more Nurofen and Strepsils as the virus becomes rampant.

The company took advantage of the shortage of infant formula in the United States, caused by the closure of a factory belonging to rival Abbott. It now feeds about half of America’s infants, a fact that partly explains the strength of its numbers.

But analysts encouraged that results were strong across the board, with Cedric Besnard of CitiBank saying the numbers across all categories “support the thesis that the company has finally pulled off a turnaround.”

The company faces the same inflationary headwinds as its rival, but faces them slightly differently.

Reckitt CFO Jeff Carr is focused on driving savings across the company’s brands and believes there’s still more left in the company’s toothpaste tube when it comes to efficiency.

Although Carr said it was committed to “responsible” pricing, the company raised prices 9.7% in the three months to June.

MIDAS VERDICT: It is convenient for investors that Reckitt and Unilever report in the same week. These two companies in the same industry show how management intervention can make a difference when companies are rocked by the same economic storms.

Reckitt currently seems a better bet, as it’s well run and streamlined, with a hunger to develop new brands to meet customer demand (laundry sanitizer is the latest innovation, as the energy crisis means people are washing their clothes at lower temperatures).

Unilever is still sprawling and uncertain. He has already jacked up prices by 11%, raising the question of how much his customers will bear.

However, we also need to look at company valuations. With a yield of 4.3% and a price-earnings ratio of 18x forecast earnings in 2022, Unilever is trading at a 20% discount to its peers in the UK and overseas. The shares fell 3.6% to £40.03 over 12 months.

Shares in Reckitt rose more than 18% to £66.46 in the same period. Its estimated dividend yield is 2.7% for this financial year and its price-to-forward earnings per share ratio is 20 times earnings for 2022, meaning it is the most expensive pick.

Reckitt is a solid company, but with the possibility of Peltz intervention pushing Unilever shares higher and a loyal customer base showing it is willing to pay higher prices, it may be worth opting for new ones tomorrow. ice cream with Unilever rather than jam today with Reckitt.

TO BUY Unilever

Traded on: main market Teleprinter: ULVR Contact: unilever.com or 020 7822 5252

HOLD Reckitt

Traded on: main market Teleprinter: RKT Contact: reckitt.com or (0)1753 506 800

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