July 2022 dividend portfolio news

It's earnings season and the RNS feed is heating up.

In this July update I'll be looking at half-year numbers from FTSE 100 consumer goods giant Unilever that weren't as bad as I feared.

I'll also take a look at a profit warning from insurer Direct Line Insurance, and look at results from a two members-only stocks, including one with a 6% dividend yield.

As a quick reminder, signing up to this newsletter is free and gives you access to my model dividend portfolio, which contains the same shares I own myself.

Disclosure: unless otherwise specified, Roland owns all the shares discussed in this article.

For an explanation of my Quality Dividend score, see here.

Unilever

Description: FTSE 100 consumer goods group with a global presence in the food, hygiene and personal care markets. Click here for an archive of past posts.

RNS release: half-year report for the six months to 30 June 2022

Underlying sales growth of 8.1%, with 9.8% price and (1.6)% volume

Unilever had already warned investors to expect big cost increases this year. What we didn't quite know was by how much the company would be able to put up its prices.

Now we know. The price of popular products such as Hellmann's mayonnaise, Magnum ice creams and Persil rose by an average of 9.8% during the first six months of this year. There was an inevitable impact on demand, with volumes sold falling by 1.6%.

The end result was better than it might have been, I think. Unilever's underlying sales rose by 8.1% during the half year, while underlying operating profit climbed 4.1% to €5.0bn. The group reported an underlying operating profit margin of 17%, a reduction of 1.8%.

These figures exclude certain items and reflect Unilever's continuing business. The company's statutory figures are slightly worse, but still consistent with underlying performance:

• Revenue +14.9% to €29.6bn (includes a 5.6% positive currency impact)
• Operating profit +1.7% to €4.5bn
• Operating margin -2% to 15.2%
• Diluted earnings per share -4.7% to €1.13

Outlook: Unilever appears to have been more successful than it expected at raising prices. The company has upgraded its full-year guidance for underlying sales growth to be higher than its previous forecast of 4.5%-6.5%.

This will be "driven by price with some further pressure on volume".

Price increases are needed to offset cost inflation, which is expected to be €4.6bn over the full year. This is an increase from the previous estimate of €3.5bn in early February (before the Ukraine war).

Underlying operating margin for the full year is expected to be 16%, at the bottom of the 16%-17% guidance range.

Dividend: The quarterly dividend was held unchanged at €0.4268 per share.

My view: Unilever wants to raise its prices to protect its profit margins, without pushing too many customers away to cheaper own brands.

I think that Unilever's product mix may leave it weaker than some rivals here. The group's home care division (cleaning products) saw the biggest fall in volume, down 3.8%.

My guess is that people will trade down more readily on cleaning products than they might on – say – pet food, chocolate or baby food. These are examples of areas where rival Nestlé has strong brands, but Unilever doesn't.

However, this isn't a big enough worry to put me off Unilever. I think the group's global portfolio of brands is likely to be durable and should survive this tough period. I'm also reassured to see that the company has increased spending on marketing and R&D to try and protect these brands.

I wouldn't say Unilever stock was obviously cheap at the moment, but my feeling is that the current valuation is probably reasonable on a long-term view. I remain happy to hold the shares in the model portfolio.

Direct Line Insurance

Description: A FTSE 100 company that's one of the UK's largest motor, home and commercial insurers.  Click here for an archive of past posts.

RNS release: Trading update

... we have seen claims inflation in motor in the first half of 2022 spike above the levels assumed in our pricing.

I normally restrict my coverage in these monthly reports to company results, rather than trading updates. This is done to avoid too much repetition and to manage my workload.

However, Direct Line's update  on 18 July was a profit warning, not just a routine trading update. So I think it merits a look.

Current trading: Niche rival Sabre Insurance had already flagged up rampant cost inflation for UK motor insurers, so this announcement wasn't a complete surprise.

Direct Line says that claims costs are rising more quickly than it had expected. As a result, motor insurance price increases over the last 12 months have not been enough to offset these costs.

As a result, profits will be lower than expected this year.

Outlook: Direct Line now expects to report a combined ratio of 96% to 98% for 2022.

An insurer's combined ratio represents the percentage of premium income that's required to fund claims and operating expenses. A figure below 100% means a company's underwriting is profitable.

In addition to any underwriting profit, insurers hope to generate an investment income from their premium income.

The good news is that Direct Line doesn't expect to report a loss this year. But the guided range is well below the company's target of 93%-95% and is disappointing.

Looking ahead, Direct Line says it increased prices through Q2 to restore margins. The company has also recently introduced "an updated motor risk pricing model" which it believes "materially improves risk selection". In theory, that should improve underwriting profitability. We'll have to see.

My view: Motor insurers in the UK are being hit by a combination of factors.

Higher used car prices mean that claims settlement figures are higher. Supply chain delays mean that parts needed for repairs can take longer to get hold of. This results in longer periods of courtesy car hire while policyholders' cars are off the road.

It's a bit of a perfect storm and is clearly a sector-wide issue. The only thing that really concerns me is the risk that intense competition in this sector will make it difficult for disciplined insurers like Direct Line to raise prices.

That could lead to a period of poor returns for shareholders.

Right now, I'm doing nothing. Although I think there's some risk of a dividend cut, I feel that the overall investment case still holds water here; Direct Line should remain a cash generative business that's generates plenty of income.

I'll take a more detailed look at Direct Line when the insurer's half-year results are published in August and I have a fresh set of financial data to work with. For now, I remain happy to hold the shares.