Can Unilever's Earnings Beat Procter & Gamble's Again This Time?

With Brexit fears fading and stimulus in the eurozone kicking in, this Europe-based consumer goods powerhouse might surpass its U.S.-based rival yet again.
By Siddhi Bajaj ,

Over the past few years, European consumer staples giant Unilever (UL) - Get Report has been giving its larger U.S.-based peer Procter & Gamble (PG) - Get Report a run for its money.

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Both operate in a difficult market, with economic fragility in home and overseas markets pulling down sales. However, a more nimble Unilever is training its sights on other high-growth markets.

With Unilever reporting second-quarter earnings Thursday and P&G slated to report fiscal fourth-quarter results on Aug. 2, let's take a look at which is a better growth stock.

In the second quarter, Unilever reported higher growth in organic sales and an even higher dividend payout.

Unilever's organic sales grew by 4.7% in the quarter, helped by a strong showing in emerging markets, which account for about about 58% of annual revenue. In its last fiscal third quarter, P&G reported an unimpressive 1% growth figure in organic revenue.

On the back of improved sales, Unilever increased its dividend by 6% this year. Meanwhile, P&G had 1% dividend growth.

P&G is trudging along, burdened by its own size.

True, the company has undertaken extensive restructuring efforts, complete with cost cuts, layoffs and the sale of major brands to Berkshire Hathaway and Coty. 

However, the fact remains that revenue growth hasn't really budged in the past five years. In fact, last year, revenue growth actually slipped and hit its lowest level in more than five years.

Unilever, too, is undertaking cost-cutting measures to operate efficiently in a difficult market. However, these efforts are supported by higher volume growth, too, and thus, an expanding market share.

Meanwhile, P&G will likely still be affected by currency fluctuations, as most of its gains are attributable to higher pricing as opposed to volumes. Consequently, P&G's top and bottom lines will likely be burdened this quarter, too.

So which one is the better buy?

For a company that has registered less than 5% growth in its share price over the past year and is expected to trade flat over the next 12 months, P&G is expensive. The behemoth's trailing 12-month price-earnings ratio stands at 26.95 times, while its forward P/E ratio is at 21.59 times.

By comparison, Unilever's forward P/E stands at 19.74 times and offers higher five-year earnings growth prospects of 7.10% annually, versus P&G's 5.87%.

In terms of dividend growth, too, the yield of both consumer goods companies stand at a little more than 3%.

Although P&G has a reputable history of dividend growth for close to six decades, far longer than Unilever, the dollar increase in dividend has shown a declining trend for P&G of late. Unilever, on the other hand, is doing the opposite, helped by cash flows that are at new highs.

The recent divestments will secure P&G's dividend payouts for the near future. However, to ensure increasing dividend payments once again, P&G needs to up its game in terms of revenue growth and profitability.

Both companies will emerge stronger once their cost-cutting efforts draw to a close. However, the wait for P&G is much longer, and the rewards just don't seem as exciting.

Unilever clearly has the upper hand.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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