Unilever (LSE:ULVR) shares have been under pressure lately and the company has garnered a lot of headlines. These criticisms include a stinging condemnation from Terry Smith, a major investor in the floundering fast moving consumer goods (FMCG) group. The share price is down about 7.6% so far this year, which means Unilever shares are underperforming the FTSE 100 benchmark.
What’s gone wrong?
Many investors would have thought a company like Unilever, with its strong brands, ought to be a good investment in a time of rising inflation. Why? Because the power of the brands, in theory, should mean it can raise prices and not lose too many customers. If people really love a certain branded shampoo, for example, they’ll buy it even if it goes up by 10p. Only the most price-sensitive customer probably even notice a rise in the price – if it’s small and the price rises are infrequent.
The problem Unilever has is its not really growing volumes, while its costs are rising. This is making growth tricky and squeezing margins. It has already stated that the underlying operating margin for 2022 is expected fall by to 16%-17%, from around 18.4% previously.
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It has also recently once again got on the wrong side of a lot of investors by seeming to try and buy growth, when it was revealed it had made bids for the consumer division being spun out of GlaxoSmithKline. That deal potentially would have cost upwards of £50bn.
Could Unilever shares outperform the FTSE 100?
Of course, there’s a chance the bad news facing Unilever is already priced in and that the shares could rebound. One catalyst could be the presence of the US activist investor Nelson Peltz on the share register. He has a track record of unlocking value in FMCG companies and could along with other investors push Unilever’s management to be bolder and focus more on growth and unlocking shareholder value.
Unilever does, all being said, still have global sales and strong distribution networks and a staple of brands spanning beauty, nutrition, and home care. So a big benefit is that its success isn’t reliant on any one type of product, or any one country. Its risk is very diversified.
Unilever shares do also now yield a fairly attractive dividend of just under 4%. So there is a recovery potential alongside income.
Finally, Unilever’s most recent set of results were arguably better than Reckitt’s. Reckitt saw net revenue and operating profit both fall, so it’s not firing on all cylinders either.
A better alternative
It’s all very well to be critical of Unilever and at the end of the day I won’t be buying the shares. I prefer Diageo shares. The beverages group has many of the same upsides as Unilever, but is performing much better. For example, it also has strong brands and global sales, and strong distribution networks. It also will benefit from an expanding global middle class, many of whom will want to drink better alcoholic drinks. The big problem with the beverages company is that its shares are expensive. They trade on a price-to-earnings ratio of 30.
Unilever shares may well continue to struggle while conditions seem set to allow Diageo to keep up its good momentum. The latter’s shares could well keep doing better than Unilever’s.
