Over the past year, inflation and rising interest rates drove investors toward safer, defensive stocks. That's why blue-chip stalwarts like Procter & Gamble (PG 0.86%), Colgate-Palmolive (CL -0.05%), and Coca-Cola (KO 0.68%) all outperformed the S&P 500 over the past 12 months. However, those American multinational companies are still highly exposed to the strong dollar, which reduces their overseas revenue and profits.
Therefore, investors should also consider investing in overseas consumer staples giants as defensive plays in this ongoing bear market. Unilever (UL 0.34%), a British consumer staples giant that sells more than 400 well-known brands across over 190 countries, fits that description. Let's review Unilever's core business, growth rates, and valuations to see if it's a worthy alternative to its American counterparts.
Image source: Getty Images.
What are Unilever's top brands and markets?
Unilever's business revolves around 13 core brands -- including Dove, Vaseline, Axe, Comfort, Hellmann's, Knorr, Ben & Jerry, and Magnum -- which generate more than 1 billion euros ($980 million) in sales every year.
The company splits its business into three main groups: Beauty & Personal Care products (41% of its revenue in the first half of 2022), Home Care products (20%), and Foods & Refreshments (39%). During that period, it generated 33% of its revenue from North America, 20% from Europe, and the remaining 46% from Asia and other markets. It notably generated more than a third of its sales from its three "priority" markets: the U.S., China, and India.
How fast is Unilever growing?
Unilever's core growth metric is its underlying sales growth (USG), which excludes its recent acquisitions and divestments. It's comparable to the "organic" sales growth of its American peers:
|
Period |
1H 2022 |
FY 2021 |
FY 2020 |
FY 2019 |
|---|---|---|---|---|
|
Beauty & Personal Care USG (YOY) |
7.5% |
3.8% |
1.2% |
2.6% |
|
Home Care USG (YOY) |
10.7% |
3.9% |
4.5% |
6.1% |
|
Foods & Refreshments USG (YOY) |
7.3% |
5.6% |
1.3% |
1.5% |
|
Total USG (YOY) |
8.1% |
4.5% |
1.9% |
2.9% |
Data source: Unilever. YOY = Year-over-year.
Unilever struggled with slower sales of beauty, personal care, and home care products in 2020 as it grappled with pandemic-related lockdowns. Its sales of hygiene-related and cleaning products accelerated throughout the crisis, but that temporary boost couldn't offset its other challenges.
However, Unilever's growth broadly stabilized in 2021 as the pandemic-related headwinds dissipated. Consumers bought more beauty products as they went out again, and its sales of food -- especially to restaurants and other recovering foodservice customers -- accelerated significantly.
In the first half of 2022, Unilever's growth accelerated again as its robust sales in the U.S., India, and other markets easily offset its lockdown-induced disruptions in China. It also raised its prices to offset the impact of inflation. For the full year, it expects underlying sales to grow by more than 6.5%.
Unilever is growing at a similar rate as its American peers. P&G's organic sales grew 7% in fiscal 2022 (which ended this June), and it expects 3% to 5% organic sales growth in fiscal 2023. Colgate-Palmolive, which grew its organic sales by 4.5% in 2021, anticipates 5% to 7% growth this year.
But what about Unilever's margins?
Unilever's underlying earnings per share (EPS) rose 5.5% in 2021, but grew just 1% year-over-year in the first half of 2022 as the inflation and currency headwinds squeezed its margins. It expects its underlying operating margin to decline about 240 basis points to 16% this year.
The company admits that while the "medium-term macroeconomic and cost inflation outlooks are uncertain and volatile," it expects higher prices, a better mix of higher-margin products, and cost-cutting measures to eventually boost its operating margins again in 2023 and 2024. On a reported basis, analysts expect its EPS to decline 10% this year before bouncing back over the following two years.
The valuations and verdict
Based on those expectations, Unilever's stock trades at 19 times next year's earnings. That makes it a bit cheaper than P&G and Colgate-Palmolive, which both trade at more than 20 times next year's earnings. Unilever's forward dividend yield of 4.3% is also significantly higher than P&G's 2.7% yield and Colgate's 2.5% yield.
Unilever's stock won't blast off anytime soon, but its stable top-line growth, reasonable valuation, and high dividend yield make it a compelling alternative to P&G, Colgate, and other American consumer staples giants as the bear market drags on.
