FTSE 100

Why has the Unilever share price lagged the FTSE 100 in the past year?

Can the Unilever share price generate improved performance versus the FTSE 100?

Over the past year, the Unilever share price (LON: ULVR) has declined by around 15%. At the same time, the FTSE 100 index (INDEXFTSE: UKX) has gained approximately 25%. That’s a 40 percentage point underperformance from the consumer goods company.

One reason for this could be rising global inflation. Unilever reported in its recent quarterly trading statement that it continues to experience elevated levels of inflation versus historic levels. This could lead to rising input costs for the business, and sector, that may or may not be fully passed on to consumers in the form of higher prices.

Therefore, while the firm has recently reported encouraging sales growth, such as the 4.4% rise in underlying revenue in the first nine months of the year, this rate of growth may not necessarily filter through to its bottom line. Indeed, in the current financial year the company is forecast to post a rather modest 1.6% rise in earnings per share.

Of course, Unilever has a wide range of strong brands that enjoy significant levels of customer loyalty. This may provide it with greater scope than many of its peers, particularly generic manufacturers, to raise prices in response to higher inflation. In fact, the stock market currently expects the business to deliver an 8% annualised rise in earnings per share over the next two financial years.

Furthermore, the company could benefit from an improving outlook for the global economy. Certainly, threats such as Covid-19 and a squeeze on consumer disposable incomes are likely to weigh on growth rates in the short run. Furthermore, the prospect of rising interest rates to curb inflation could disrupt recent improvements in consumer spending levels. However, the IMF still forecasts 6% GDP growth for the global economy in 2021, followed by 4.4% growth in 2022. This could stimulate many of the markets in which Unilever operates.

Following Unilever’s share price fall, the company now trades on a price-earnings ratio of around 24.7. This is higher than many FTSE 100 shares, and a number of global consumer goods companies. However, it could be justified by factors such as the firm’s improving financial prospects, a strategy that aims to tap into a shift towards greater sustainability, and a broad range of brands that provide diversification benefits.

Therefore, while persistent high inflation may continue to act as a drag on Unilever’s stock price in the short run, the company’s high degree of brand loyalty could position it for long-term growth relative to many of its sector peers.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

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