Unilever plc (LON:ULVR) said it plans to launch a €6bn share buyback as it reported a 3.4% increase in underlying sales in the first quarter.
But shares dropped 2.19% to 3,857p each in morning trading as the announcement failed to impress investors.
“At first glance Unilever’s first-quarter update reads well with underlying sales growth of 3.4% and the launch of a new €6bn share buy back scheme,” said Russ Mould, investment director at AJ Bell.
“However, the shares are largely shrugging off the news and may instead be focusing on how Unilever is exchanging pricing power for volume growth, in a move which may suggest that 18 months after the fact we are now finding out who was the winner in the spat between Tesco and Unilever over the price of Marmite – and it may not be Unilever."
Unilever losing pricing power?
The consumer goods giant raised prices by just 0.1% in the first quarter, a marked reversal from the trend seen in the third quarter of 2016 during Unilever’s spat with Tesco. This was seen to suggest that Unilever may be losing its pricing power following a dispute with Tesco over raising the price of Marmite.
Instead of price, an increase in volumes was the key contributor to a 3.4% rise in underlying sales to €12.6bn in the first quarter.
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Excluding the margarine and spreads business Unilever is selling, underlying sales rose 3.7% to €11.9bn, boosted by strong performance in the home care and beauty and personal care businesses.
The beauty and personal care division, which includes the Dove, Vaseline, Rexona and Sunsilk brands, delivered a 3.9% increase in underlying sales.
Home care, the unit that includes Domestos and Persil, posted 4.9% sales growth.
Underlying sales growth in the foods and refreshment business that comprises Ben & Jerry’s and Magnum ice-cream brands was 2.7%, excluding spreads.
Emerging markets grew underlying sales by 5.1% while developed markets increased 1.1% despite ongoing price deflation in Europe and North America.
On an unadjusted basis, however, group turnover fell 5.2% to €12.6bn due to the impact of foreign exchange rates as well as acquisitions and disposals.
Full year guidance left unchanged
The company raised its quarterly dividend by 8% to €0.3872 as it reiterated its full year guidance.
“For the full year, we continue to expect underlying sales growth in the 3% - 5% range and an improvement in underlying operating margin and cash flow that keep us on track for our 2020 goals,” said chief executive Paul Polman.
Unilever said it intends to start the share buyback in May to return the expected proceeds from the sale of its margarine and spreads business.
The margarine and spreads business, which includes the Becel, Flora, Country Crock and Blue Band brands, is being sold to private equity firm KKR for €6.83bn.