When Unilever (LON:ULVR) last updated the market, the fact shares rose on news that sales shrunk, is a measure of how low expectations have become. Despite increased demand for hygiene products underlying sales fell 0.3% in the three months to June 30. The reason for cheer was that analysts had been expecting a 4.3% decrease.
The result is particularly unflattering when you compare it to the progress being made at rival Reckitt Benckiser (LON:RB). Reckitt announced second-quarter group like-for-like growth of +10.5%. Third quarter sales on a like-for-like basis rose 13.3% in the third quarter to £3.5bn and were 12.4% higher in the year to date at £10.4bn.
I think that explains primarily why the share prices have been performing so differently. For the year to date at the time of writing Reckitt’s shares are up around 16%. That compares to Unilever’s shares which have risen by around 11%. The gap has been greater and Reckitt’s good results are likley to create more of a mismatch between the two companies. That can’t easily be explained away. After all, both are FCMG groups, with exposure to China and other international markets and both are in the FTSE 100.
The reasons for the difference
Both also have relatively new chief executives. Reckitt appointed an outsider who came from PepsiCo, while Unilever promoted internally. Perhaps there’s greater optimism that an outsider can deliver bigger change at Reckitt? Reckitt management are certainly talking a better game in my view. They’re promising huge investment in transformation and a return to growth. Unilever by contrast seems to be more focused in consolidating its business in the UK rather than being an Anglo-Dutch company. It had previously got investors offside by trying to delist from the FTSE 100. An effort which ended in failure.
Reckitt’s greater focus on hygiene may account for some of the difference between the groups. At Reckitt the category ‘hygiene’ makes up 39% of net revenue and 38% of adjusted operating profit. It’s less than that at Unilever where the equivalent ‘home care’ category is noticeably smaller than its beauty and food categories. Home care accounts for €10.8bn of turnover out of a total €52bn. So it’s roughly 20% of turnover. The pandemic has made this difference important. As has the fact Unilever seems to be struggling with its biggest category ‘beauty’ struggling to grow prices. Volume growth has also been weak, it increased just 1.7% in the last year.
Moving onto the dividend neither is high yielding so it’s more sensible to focus on dividend growth. Growth is stronger at Unilever but that has come at the expense of dividend cover which is falling. The cover has dropped from around twice covered by earnings to more like 1.6x. When both groups are struggling to grow earnings, dividend cover will become more important. On that basis, Reckitt looks better with its cover of around two.
Neither company is firing on all cylinders at the moment but it seems, for now, investors like the look of the turnaround at RB and its share price has the momentum. Boosted in no small part by the covid-19 pandemic. It’ll be interesting to see if that positive sentiment can be maintained after countries return to the so-called ‘new normal’.
I’m not looking to add to my Reckitt Benckiser holding as the company still has some work to do to show it can compound well over time and it’s the largest holding in my SIPP already. I’m also not keen to buy any Unilever either as it strikes me its more out of favour and is struggling to grow volumes and price meaningfully. Both of which I find concerning.
Please note I own shares in Reckitt Benckiser.
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