Questor share tip: Unilever is a hold - for now

Rising prices aren't going away – and that's a challenge for businesses as well as individuals trying to balance the household budget.

Unilever
£19.87 +45p
Questor says HOLD

Last week, the maker of Ben & Jerry's ice cream and Dove soap warned that price inflation would be higher than previously expected.

Commodity costs are now expected to account for between 14pc and 16pc of revenues this year, against previous expectations of 11pc to 13pc. This means management are now seeking an extra €300m (£270m) of cost savings this year, bringing the total target to €1.3bn.

However, it looks like higher prices will have to be passed on to the consumer, which could crimp volumes. In the first quarter, volumes rose by 2.5pc and prices by 1.8pc.

Rising prices are expected to be a bigger hit for Unilever than peers such as Nestlé and Danone because Unilever uses more vegetable oil in its spread business and more chemicals in its skin and laundry products.

However, things weren't all negative. Turnover in the first quarter of the year rose 7pc to €10.9bn, with growth in the all-important emerging market sector up 9.9pc. Emerging economies are expected to make up about 56pc of revenues this year, more than making up for weak Western markets. Sales in Western Europe fell 2.7pc in the first three months of the year.

There was also good news on the dividend, with the first-quarter payment increased by 8.2pc to 19.96p. It will be paid on June 15 and the current yield is 4pc.

Unilever shares are currently trading near the top of their recent trading range – and all-time high of £19.95, hit in December. It is true that the market is pricing in the commodity costs higher than peers as the shares trade on a current-year earnings multiple of 13.8 times, compared with 16.4 for Nestlé and 16.3 for Danone.

However, investors be cautious until we see what the second quarter brings in terms of delivering on cost-cutting and the ability to increase prices without hitting volumes. The shares, which are up 30pc since they were recommended on November 25 2008 at £15.30, are now a hold.