Unilever (LSE: ULVR) may not seem cheap with its shares trading at a trailing price-to-earnings ratio of 24.1 times (compared to the FTSE 100’s weighted average p/e of 19.6 times), but I see good reasons why investors may be willing to pay a premium for the consumer goods giant.
The Anglo-Dutch company is set to make big changes following a failed attempt by Kraft Heinz to buy the company back in February. It’s been a big wake-up call for Unilever, with management promising to accelerate sustainable shareholder value creation.
It’s already promised to expand its cost-reduction plan to save a further €2bn, buy back €5bn worth of its shares this year and hike dividends by 12%. And looking ahead, I reckon there’s plenty more to come as the company examines its sprawling product portfolio for restructuring opportunities to unlock value and deliver faster future growth.
Big strategic decisions
Unilever is indicating its preparedness to make big strategic decisions. In April, it said it would combine its foods and refreshment divisions into one organisation, to produce “a leaner and more focused business.”
And since then, it has followed that up with some major acquisitions and disposals. This includes putting up for sale its spreads and margarine business, which has seen shrinking sales in recent years, and actively buying higher-value, premium brands, such as Hourglass, Pukka Herbs and Carver Korea, to gain exposure to the faster-growing segments of the market.
Following a strong start to the year, Unilever shares have eased back a bit in the past two weeks. It’s still trading above £43-a-share, but I reckon this could be a good buying opportunity for long-term investors. City analysts are quite bullish about Unilever’s earnings growth prospects — they expect underlying earnings per share to climb 15% this year, with a further advance of 11% pencilled in for the following year.
Would Reckitt make a better buy?
Shares in rival Reckitt Benckiser (LSE: RB) have lagged Unilever by some 32% percentage points since the start of the year. Its shares are down 1% year-to-date, compared to Unilever’s gain of 32%.
The company has been hit a series of problems over the past year-and-a-half, ranging from a boycott of its products in South Korea and the June cyberattack, which disrupted manufacturing and distribution and hit sales. Growth is slowing at a number of its brands as consumers switch to cheaper rivals and consumer preferences change.
Its newly acquired Mead Johnson baby food business has also been growing slower than expected. And to make matters worse, four of its 10-strong senior executive team are set to leave the company at a time when stable leadership is needed to absorb its biggest-ever acquisition and overcome its recent difficulties.
On the upside, Reckitt’s forward-looking valuations are more appealing, with shares trading at 19.5 times this year’s expected earnings, compared to Unilever’s 21.1 times. What’s more, the shares also trade a significant discount on its five-year historical average of 21.8 times.