Unilever rewarded for stability, short but sweet update from Tate & Lyle

“The markets regained some poise on Thursday supported by positive news on a potential coronavirus vaccine – seen by many as the main route back to some form of normality – and positive corporate results on both sides of the Atlantic,” says Russ Mould, Investment Director at AJ Bell.

“Consumer goods giant Unilever did much better than expected with its latest set of numbers, as did US technology titans Microsoft and Tesla overnight.

“While the pandemic has been a short, intense headache for economies and markets, two other factors have stuck around like a lingering migraine for the last few years. These are the growing tensions between China and the US (as well as other parts of the world) and the risk of the UK not securing a trade deal with the EU.

“For the time being investors seem to move in whenever there is a drop-off in stock markets. Whether that will continue to be the case throughout the summer is a key thing to watch."

Unilever

“Business resilience is a much sought-after attribute in the current economic climate and Unilever has certainly got the right ingredients. While it failed to deliver any sales growth on a group basis during its first-half period, its performance was considerably better than expected.

“Analysts had forecast a 7.4% drop in second quarter sales, yet Unilever delivered a mere 0.3% decline. High demand for hygiene products helped make up for a decline in food and drink sales. While people are home were busy ordering ice cream and tea bags, Unilever suffered from a reduction in demand from cafes, bars, restaurants and ice cream vans.

“The overall stability in its business triggered a big share price rally, helped by a large increase in free cash flow which is the cash generated from operations minus the money it needs to reinvest in the business to keep it competitive.

“A separation of most of its tea business provides additional excitement although that won’t play out until the end of next year.

“In a world where investors have been obsessed with growth, one might have thought Unilever’s pedestrian performance would have gone down like a cup of cold gravy. However, resilience is a highly-desired characteristic and the latest trading update is likely to attract a lot of interest from people who had previously dismissed the company as being too boring.”

Tate & Lyle

“It may have sold its sugar arm a decade ago but investors were still sweet on ingredients business Tate & Lyle after its latest trading update which encompassed the height of the coronavirus crisis.

“The fact revenue was actually up in its Food & Beverage Solutions division for the three months to June is a remarkable feat and reflects a desire for comfort food in the form of biscuits, snacks and drinks while people have been stuck indoors – no wonder many people are emerging from the restrictions with lockdown tummies.

“The drop off in demand for its input into out-of-home products had a bigger impact on the other parts of the group – namely its Sucralose and Primary Products business units – but on the whole a 5% decline in revenue for the period has to be considered a decent outcome.

“The material decline in net debt over the period is testament to the company’s careful management of cash as well as sacrifices on the part of staff who saw pay frozen. The company’s decision not to take advantage of government aid is a tick in the corporate governance box and underpins the decision to recommend an unchanged dividend at the full year stage.

“Tate also deserves credit for keeping its staff safe while keeping all of its facilities fully operational through the quarter and this will have supported continued innovation and a near double-digit increase in new product revenue.”

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