Better Buy: Procter & Gamble Co vs. Unilever

By Markets Fool.com

Procter & Gamble (NYSE: PG) and Unilever (NYSE: UL) have moved in lockstep over the past few years, with each stock rising roughly 40% since 2011, for about half the return of the broader market.

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And why not? At a glance, they seem like interchangeable investments: Both consumer goods giants generate profits from a deep portfolio of global brands (P&G has Tide, Unilever has Dove). Shareholders also benefit from steady, predictable cash returns in the form of billions of dollars in annual spending on dividends and stock buybacks.

Yet there are key differences that make Unilever a better buy for growth-oriented investors right now while P&G seems preferable to those seeking higher cash returns.

Here are a few statistics to set the stage:

Metric

P&G

Unilever

Market cap

$231 billion

$130 billion

Sales growth

1%

4%

Profit margin

15%

15%

Dividend yield

3.1%

3.1%

Forward P/E

21

23

Sales growth excludes acquisitions and divestments and is on a constant currency basis for the past complete fiscal year. Data sources: Company financial filings and S&P Global Market Intelligence.

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Unilever has faster, more balanced growth

Both companies are struggling through a difficult global sales environment. Demand gains in emerging markets have slowed to near zero while developed economies like the U.S. are in their third straight year of slightly negative growth.

Image source: Unilever investor presentation.

There's no reason to think those headwinds will change anytime soon, either. Unilever CEO Paul Polman told investors in July that executives "do not see any sign of an improving global economy" for 2016.

P&G is trailing Unilever by a substantial margin on this critical metric, though. It logged just 1% higher organic sales in its last fiscal year, compared to nearly 5% for Unilever. Worse yet, P&G's gains lately have mostly come solely from price increases rather than a mix of higher prices and improving sales volumes. Unilever's growth, in contrast, has been driven by volume -- indicating market share gains.

P&G's latest quarter showed encouraging signs that a volume rebound is gaining steam. The company still expects to underperform its markets, though -- albeit at an improving rate.

P&G has more cash for shareholders

Procter & Gamble is offsetting much of that growth stumble through aggressive cost cutting and a portfolio reboot that points to greater profitability ahead. Management has already sliced $7 billion from annual costs while at the same time removing dozens of less profitable brands.

Image source: P&G.

In fact, thanks to the expense declines and the cash that P&G will raise from selling off its beauty brands, profits should spike by 50% over the coming 12 months, giving the company enough ammunition to fund an incredible level of cash returns. CEO David Taylor and his team plan to return $22 billion to shareholders this year -- $15 billion through share repurchases and $7 billion through dividends, representing nearly 10% of its entire market capitalization.

If you're looking for the business with a stronger growth track record, then Unilever is your stock. Its volume-driven sales growth implies further market share gains ahead even as P&G struggles to get back on the offensive in its key categories this year.

A bet on P&G carries more risk, since it's unclear whether the new, slimmer portfolio of brands will reinvigorate growth. By management's admission, the giant is "executing the largest transformation in our company's history." Yes, shareholders will enjoy gobs of cash returns over the next 12 months. But unless that's followed by an improvement in organic growth, the stock should trail Unilever's in the coming years.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Procter and Gamble and Unilever. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.