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Rising inflation, inverted yield curves and rising energy prices are raising fears that consumer spending is about to contract. Here’s why the Unilever (LSE:ULVR) The stock price could be attractive as recession fears mount.
Things people use
Unilever is one of 10 companies that controls everything we buy. These companies make things like food, cleaning products, and toiletries.
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A rise in the cost of living could force consumers to spend less on things they can live without. But while that might be bad news for companies that sell vacations and cars, we’re less likely to make deep cuts in things like food and toothpaste.
To see why I think Unilever’s stock price might be attractive with a recession on the horizon, let’s compare it to two of the other companies that control everything we buy: Kellogg (NYSE:K) and The Kraft-Heinz Company (NYSE: KHC).
Brand power
Each of these companies draws its strength from its portfolio of recognized brands. Strong brands allow companies to charge a premium for their products. This should result in an increase operating margins. So, in order to gauge brand strength, let’s see how Unilever’s operating margin compares to Kellogg’s and Kraft-Heinz’s operating margins over the past four years.
| Operating margin | 2021 | 2020 | 2019 | 2018 |
|---|---|---|---|---|
| Unilever | 18.4% | 18.5% | 16.8% | 24.6% |
| Kellogg | 12.4% | 12.8% | 10.3% | 12.6% |
| Kraft-Heinz | 19.6% | 21.1% | 19.9% | 21.8% |
As we can see, Unilever’s operating margin is consistently the highest in the group. This tells me that he is able to charge a high price for his products.
Debt
Unilever, Kellogg and Kraft-Heinz all have large debts. Paying interest on debt can hamper a company’s ability to make money for its shareholders. We can rate Unilever against its rivals here by comparing each company interest charges — the amount of interest that the company pays on its debt — with operating result. The results are as follows:
| Operating result | Interest charges | Interest as % of operating income | |
|---|---|---|---|
| Unilever (€) | 8,702,000 | 491,000 | 5.64% |
| Kellogg ($) | 1,752,000 | 223,000 | 12.73% |
| Kraft Heinz ($) | 5,094,000 | 2,047,000 | 40.18% |
Of the three, Unilever pays the smallest amount of its operating profit as interest on its debt. This is a good thing. It should give the company greater financial flexibility and give it better opportunities to adapt its business in the future.
Conclusion
Unilever appears to be able to use its strong portfolio of brands more effectively than its rivals and it also has interest payments on its debt well under control. Investing in Unilever is risky as the company is trying to restructure its product line with a view to growth. And I wouldn’t expect Unilever shares to be entirely immune to a general downward move in the stock market. But if I was looking to buy shares in a consumer products company to hedge against a coming recession, I would view Unilever’s stock price as a buying opportunity today.
