Unilever and Nestle Woo Investors With Cash Amid Pricing Squeeze

(Bloomberg) -- Unilever, Nestle SA and other consumer giants are wooing investors with cash rewards as they lose the pricing power that’s historically driven sales growth and predators circle the industry.

Unilever, the maker of Hellmann’s mayonnaise and Ben & Jerry’s ice cream, said Thursday that it plans a 6 billion-euro ($7.4 billion) share buyback, while distiller Pernod Ricard SA will boost its dividend. In adopting more shareholder-friendly stances, they’re following Nestle, which is buying back as much as $21 billion of its stock.

The moves come as Nestle, Unilever and rival Procter & Gamble Co. find it ever harder to raise prices, with consumers seeking online bargains from Amazon.com Inc. and doing more of their shopping at discount grocers. All three of the consumer giants are revamping their portfolios, with Nestle and Unilever snapping up niche makers of healthier foods and the U.S. company on Thursday agreeing to buy the consumer health business of Germany’s Merck KGaA.

By boosting returns, the companies are trying to keep shareholders loyal as activist investors and potential acquirers loom. Unilever last year fended off an unwanted takeover bid from Kraft Heinz Co., while Dan Loeb’s hedge fund bought a stake in Nestle and billionaire Nelson Peltz gained a seat on P&G’s board after criticizing the company’s growth strategy.

Despite the share buyback, Unilever shares fell as much as 2.6 percent in Amsterdam, while Nestle was up 0.4 percent in Zurich.

“Chronically weak pricing” from Unilever and Nestle will “play to the market’s fears,” Jefferies analyst Martin Deboo said in a note.

Pricing Trails

Unilever was able to squeeze out gains of only 0.1 percent in underlying pricing in the first quarter, down from a 0.7 percent increase in the previous three months. Nestle’s quarterly increase of 0.2 percent was barely better.

For both companies, pricing lagged behind sales growth. At the Vevey, Switzerland-based maker of Purina Dog Chow and KitKat chocolate, first-quarter sales rose 2.8 percent on an organic basis, above analyst expectations for 2.5 percent. Unilever’s sales rose 3.4 percent on an underlying basis, matching a company-compiled estimate.

Unilever expects pricing pressure to ease somewhat in the second half, Chief Financial Officer Graeme Pitkethly said by phone.

“We’ve still got negative pricing in North America and Europe -- you’ve got Amazon, with a lot of promotional intensity in deodorants,” Pitkethly said, referring to the e-commerce giant’s discounted offers. “I’ve never felt bold enough to say we’ll get back to an inflationary environment again in Europe.”

Nestle Chief Executive Officer Mark Schneider is revamping the world’s largest food company around businesses like pet care, coffee and bottled water after jettisoning the U.S. confectionery business and adding healthy-food brands. Nestle said pet care recorded the highest organic growth of any of its main product categories in the first quarter, at 4.7 percent.

Cost Savings

Unilever has pledged more cost savings and greater profitability after its successful defense against Kraft Heinz. It sold its spreads unit, which included the Flora brand, to investment firm KKR & Co. In a deflationary environment for big brands, the company has added fast-growing businesses such as Pukka Herbs tea to its roster of brands to accelerate growth.

While Nestle reported better-than-expected sales growth in the first quarter, analysts pointed to deteriorating pricing power as an area of concern. Nestle’s quarterly price increases were below estimates and at a historic low, according to Pierre Tegner, an analyst at Natixis.

“The price effect is deteriorating much faster than we expected,” Tegner said, adding that Nestle needs to step up efforts to innovate and streamline its portfolio.

To contact the reporters on this story: Thomas Buckley in London at tbuckley25@bloomberg.net, Corinne Gretler in Zurich at cgretler1@bloomberg.net.

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, John J. Edwards III

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