Unilever remains Evenlode fund favourite despite ‘unusual’ dispute

Yarrow Hugh Evenlode 2014

Evenlode’s Hugh Yarrow remains bullish on Unilever despite the “unusual” dispute between the company and Tesco.

In its results released today, Unilever reported better than expected sales in Q3 but admitted slowing volume growth. Recently the firm’s conflict with Tesco over price hikes has came to the fore, with the falling pound prompting Unilever to raise prices, which Tesco is refusing to pay.

Yarrow, manager of the £1bn Evenlode Income fund, holds a 6.2 per cent position in Unilever – its second largest after its 6.8 per cent Diageo holding.

He says that while pricing negotiations are often seen in emerging markets due to frequent currency depreciations, they are not commonplace in the UK.

“What is unusual is that it is happening in the UK, due to the uncharacteristically volatile year that sterling is having,” Yarrow says.

He points out that Unilever’s UK business only represents about 5 per cent of total profits, adding that the company is cash generative with a dividend yield of 3.2 per cent and a growing dividend of over 6 per cent.

Yarrow says: “Unilever’s management have suggested that problems haven’t occurred with other retailers and expect this particular issue to be resolved quickly… We continue to view the stock as an attractive investment for the long-term dividend growth investor.”

Graham Spooner, investment research analyst at The Share Centre, warns “this could be the start of the impact of Brexit in every household in Britain”. He says Unilever’s volume growth may be further hit by the pricing dispute, adding that the company could “see a backlash from the other major UK grocers”.

However The Share Centre continues to recommend Unilever as a ‘buy’ for lower risk investors, noting the “healthy dividend” and company’s diverse portfolio of global brands.

“Unilever continues to see the benefits of its cost-cutting measures and a recovery in emerging markets. As the shares have performed strongly in recent times and the short-term outlook is more uncertain, we would suggest investors drip-feed into the stock.”

Laith Khalaf, senior analyst at Hargreaves Lansdown, says things look “pretty ugly” for retailers and warns the outlook for consumers and cash savers is not much better.

“This pricing spat is likely to be the thin end of the wedge when it comes to relationships between UK retailers and their suppliers, in light of the pressures now applied by weaker sterling,” Khalaf says.

“Things look pretty ugly for retailers, who face an extremely competitive pricing environment, along with the challenge of adapting to changes in consumer behaviour driven by the digital revolution. It also doesn’t bode too well for consumers, who may soon face higher prices if retailers can’t entirely defray the higher costs of imports.”

The potential for rising inflation could also be detrimental to consumers who are cash savers, Khalaf adds. “[Cash savers] will find the measly crumbs of interest they are currently picking up aren’t sufficient to protect them from price rises, and the buying power of their savings will actually start going backwards.”