Investors have developed a liking for consumer companies such as Unilever (LSE: ULVR). That’s because branded products tend to have lots of loyal customers. This makes for reasonably predictable profits and respectable returns on assets.
And with Unilever there’s supposed to be another attraction – emerging markets. The company gets more than half of its sales from emerging economies and that is supposed to grow profits faster.
Trouble is, sales in emerging markets are going up, but not as fast as the City expected. True, they increased by 6.3% in the last quarter, but that’s probably not good enough when sales in Europe are shrinking.
Throw in the fact that exchange rates are working against the company, and Unilever’s earnings are not expected to grow this year.
It’s not all bad news though. Unilever’s personal care – around two billion people a day use Unilever products – and ice cream businesses are doing well and taking market share from the competition.
What’s more, profit margins are being maintained as the company cuts costs. So Unilever should still generate plenty of cash to pay dividends.
Apart from profits growth, the main stumbling block is Unilever’s share price. Paying over 20 times earnings for a business that isn’t really growing is hard to justify. On the other hand, it’s paying out around 90p a year in dividends, giving it a reasonable yield of 3.4%.
Verdict: hold