Could the Unilever share price be boosted by the sale of its tea business?

Unilever (LSE: ULVR) has finally agreed to sell its tea business. This business, which has brands included PG Tips and Lipton, is being sold to private equity firm CVC Partners for £3.8bn. As the Unilever share price has struggled over the past 12 months, could this slimming down help lift the shares? Could it even signal that the strategy of CEO Alan Jope can deliver value for shareholders over the coming months and years?

Unilever share price: ready to bounce?

Given that Unilever’s shares have been heading back down towards one-year lows, there seems to be plenty of room for the share price to recover in the short term.

Longer. term there’s also a lot to like about a business that sells products that are available in over 190 countries and claims 2.5bn people use its products every day. The result is a huge amount of cash and diversified earnings. It’s not reliant on any one type of product or country to make its money. That’s why investors have tended to like the shares of fast-moving consumer goods (FMCG) groups like Unilever, Diageo and Reckitt.

Fundamentally though, Unilever is looking like an attractive business that’s starting to perform better under Alan Jope’s leadership. He took over as Unilever CEO in January 2019. Today, the group has operating margins of 16%, return on capital employed of 17% and has a dividend yield of around 3.9%, so it strikes me as a high-quality business. 

Online sales, I think, have the potential to really help Unilever grow. In the most recent trading update, Unilever said e-commerce grew 38% and now makes up 12% of its overall sales.

What could hurt the shares?

One of the big concerns many investors will have is around inflation and cost pressures. Unilever has acknowledged cost pressures are unprecedented at the moment but was able in Q3 to grow both volume and price across its three product categories – beauty & personal care, home care, and foods & refreshment.

Unilever is undoubtedly growing at quite a pedestrian pace, but it’s also a massive company. I think the tea business disposal shows management is focusing on the strongest growth areas within the multinational. That should be good for the future share price. Greater clarity has been very beneficial for Aviva’s shares, to highlight one example, in recent years. The same could well happen to Unilever shares.

The other thing I’m watching for is that consumers don’t reject Unilever’s mass brands, especially in the beauty category as more and more consumers experiment with indie brands. Yes, Unilever can acquire such brands itself, but competition is still intense in its operating segments. That said, with its huge marketing budgets and global markets, I think it’s a risk that Unilever’s management can handle.

The sale of the tea business is a good move. That’s why I’ll be keeping an eye on the Unilever share price. However, I’d want to see more growth from the FMCG company before I added it to my portfolio. Yet I suspect current investors will be happy that management has succeeded in carrying out its plan of selling the tea ops. It could be a positive sign for the future direction of the group and could, I believe, drive the share price higher.

Andy Ross owns shares in Diageo. The Motley Fool UK has recommended Diageo, Reckitt plc, and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.