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MIDAS SHARE TIPS: Clean up with Reckitt and Unilever

Week after week, the cost of living crisis is pushing up the prices of everyday items such as shower gel and laundry detergent.

Giants in household items Unilever and Reckitt both told a story of price inflation when they reported results last week, but also raised earnings expectations, suggesting sales remain strong even as customers’ wallets lighten.

Many analysts are fans of the stock and call their beloved brands strong and reliable.

They also praise a successful turnaround at Reckitt and anchored emerging markets positions and high margins at Unilever. Both companies also pay good dividends.

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

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

But there is a big question mark for the coming years for both companies as we all struggle with rising bills.

Understandably, it’s tempting to buy a proprietary kitchen cleaner at higher prices rather than a more expensive bottle like Cif.

It will indeed be fascinating to see how customers will react to Marmite, made by Unilever, which costs 11 percent more.

Meanwhile, as the wave of inflation continues to haunt us, is Reckitt, manufacturers of Durex, the protection your portfolio needs, or will it, as the maker of Gaviscon, give your investments indigestion too?

Unilever

First of all, think of Unilever, the former Anglo-Dutch conglomerate that became fully British in 2020 in a simplification of its share structure.

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

And juggling responsibilities was far from easy for management. The company’s stock price has lagged the market since 2017, when it turned down an offer for rival Kraft.

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

Veteran investor Terry Smith didn’t mince words about the episode, describing it as a ‘near-death experience’ for Unilever and suggesting management should step down.

Smith – a major shareholder of Unilever, through investment fund Fundsmith Equity – is not the only investor management should be concerned about. In May, activist shareholder Nelson Peltz joined the board of directors, sparking speculation that he would shake up operations and possibly even force a split, as he has done with other companies.

As a result, the company had a lot to prove with last week’s first half figures. It delivered – up to a point. The company posted a 1.6 percent decline in sales, but cash sales rose eight percent, and analysts raised their full-year earnings estimates.

This is all cheering, but there’s an ogre on the horizon who can’t be content with a Magnum or two. Yes, inflation – which has already boosted prices for Unilever’s companies by 11 percent.

Chief operating officer Graeme Pitkethly says consumers are happy to pay these higher prices right now, but there will definitely come a time when people will swap their Ben & Jerry’s for Tesco Value vanilla. At that time, Unilever’s turnover by volume will decrease even further.

Reckitt

At first glance, Reckitt looks like a smaller Unilever. It is a brand-oriented company whose top brands are Dettol, Finish and Durex.

Still, shareholders have been cleaning up over the past 12 months, with the company’s stock price rising 20 percent.

Reckitt is a turnaround story. It struggled to digest the Mead Johnson baby food brand in 2017 and has since changed management and financed a restructuring.

Last week’s results were creditable, although the Covid comparison makes it difficult to see the full picture. People no longer inject Dettol every five minutes, but buy more Nurofen and Strepsils as the virus becomes endemic.

The company has benefited from the infant formula shortage in the US caused by the closure of a rival Abbott factory. It now feeds about half of American infants, a fact that explains some of the strength in its numbers.

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

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

Reckitt CFO Jeff Carr is focused on squeezing savings from the company’s brands and believes there’s even more left in the corporate toothpaste tube when it comes to efficiency.

Despite Carr saying he is committed to “responsible” pricing, the company has increased prices by 9.7 percent in the three months to June.

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

Reckitt currently looks like a better bet as it is 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 leads people to wash clothes at lower temperatures).

Unilever is still vast and uncertain. It has already pushed prices up 11 percent, raising the question of how much its customers will endure.

However, we also need to look at business valuations. With a return of 4.3 percent and a price-to-earnings ratio of 18 times expected earnings in 2022, Unilever is trading at a 20 percent discount to peers in the UK and abroad. Shares are down 3.6 per cent in 12 months to £40.03.

Reckitt shares are up more than 18 per cent over the same period to £66.46. The estimated dividend yield for this fiscal year is 2.7 percent and the P/E per share is 20 times earnings for 2022, meaning it’s the more expensive choice.

Reckitt is a solid company, but with the ability of Peltz to intervene to boost Unilever’s shares, and a loyal customer base that shows they are willing to pay higher prices, it might be worth going for ice cream tomorrow at Unilever instead of jamming with Reckitt today.

TO BUY Unilever

Traded on: Main market ticker: ULVR Contact: unilever.com or 020 7822 5252

DELAY Reckitt

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

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