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Better Buy: Procter & Gamble vs. Unilever

John Ballard, The Motley Fool

There is a lot to like about Procter & Gamble (NYSE: PG) and Unilever (NYSE: UN). These companies make products that people all over the world use every day, and both are good dividend payers.

Procter & Gamble is the home of household products like Tide, Gillette, Charmin, Crest, and Oral-B. Unilever's brands include Dove, Lipton, Breyer's, and Ben & Jerry's, as well as several international brands.

Given that both companies benefit from similar advantages of brand power and scale, this better-buy contest will be decided by the numbers. We'll compare both stocks on financial fortitude, valuation, dividends, and growth expectations to determine which is the better buy for investors today.

A woman studying a consumer goods product in her hands while walking down a grocery store aisle.

Image source: Getty Images.

Financial fortitude

Both Procter & Gamble and Unilever carry more debt than cash, which isn't a bad thing. These companies don't have to worry too much about economic recessions because consumers are still going to buy cleaning products, soaps, and other essentials during a slowdown in the economy.

Still, the company with greater cash resources can benefit shareholders in many ways, including the ability for the company to increase the dividend payout or make share repurchases. It also gives management more strategic options in terms of reinvesting in growth initiatives or making accretive acquisitions that enhance the company's growth and profitability.

With that in mind, here's how both companies measure up on key financial metrics: 

Metric Procter & Gamble Unilever
Revenue (TTM) $66.91 billion $59.57 billion
Cash $12.12 billion $4.695 billion
Debt $33.63 billion $28.47 billion
Free cash flow (TTM) $11.53 billion $6.293 billion
Free cash flow as a percentage of revenue 17.2% 10.6%
Times interest earned 48.38 26.97

Data source: YCharts. TTM = trailing 12 months.

First, note that both companies are similar in size based on annual revenue. Despite this size, P&G has significantly more cash on its balance sheet, generates more free cash flow, and makes enough operating income to cover its interest expense 48 times over.

Winner: Procter & Gamble

Valuation and dividends

When deciding between two stocks to buy, it's always important to consider each one's valuation against the other. Here's how both stocks compare on the price to earnings (P/E) ratio and dividend yield: 

Metric Procter & Gamble  Unilever
Trailing P/E 24.07 13.71
Forward P/E 22.26 19.53
PEG ratio 3.43 2.06
Dividend yield 2.91% 3.21%
Dividend payout ratio 69.13% 44.3%

Data sources: YCharts and Yahoo! Finance.

Unilever wins on every measure. Not only does the stock sport a lower valuation, but the company is also expected to deliver higher earnings growth than P&G going forward (more on that below), which is why Unilever sports a lower PEG (price-to-earnings-growth) ratio. Plus, the stock offers a higher dividend yield despite paying out a lower percentage of its earnings.

Winner: Unilever

Which company is growing faster?

P&G has spent the last few years simplifying its product portfolio and cutting out unnecessary costs to improve performance. These moves have improved margins, but it's also given management an opportunity to focus on investing in the products that have the best growth prospects.

In the last two quarters, organic sales growth accelerated to 4% year over year, driven by broad strength across most categories. Strong top-line growth led to low-double-digit growth in adjusted earnings per share on a currency-neutral basis. In the fiscal second quarter, adjusted earnings growth reached 13% year over year.

However, the grooming segment (10% of total sales) has faced mounting competition from niche brands that are offering quality shaving products at prices that undercut P&G's Gillette brand. As a result, organic sales in the grooming segment declined 3% year over year in the last quarter, and net earnings for the segment fell 11%. 

Regardless, with most categories hitting their stride right now, management expects fiscal 2019 organic sales to rise between 2% and 4%, and for adjusted earnings to increase between 3% and 8%. Looking further out, Wall Street analysts expect P&G to grow earnings 6.5% per year over the next five years. 

On the other side, Unilever has experienced solid results as well. Adjusted sales growth (excluding currency) increased by 3.1% in 2018, and that translated to adjusted earnings growth of 12.8%. These results were driven by growth across all product divisions: beauty and personal care, home care, and foods and refreshment. 

As for guidance, management is calling for 2019 adjusted sales to increase at the lower end of its long-term goal of 3% to 5%. Analysts expect Unilever to grow earnings faster than P&G at 9.3% annually over the next five years. 

Both companies are performing well, but P&G is at a slight disadvantage having to nurse the struggling grooming segment. Meanwhile, Unilever's vast roster of products seems to be at full strength, and with management calling for slightly faster top-line growth in the short term, it has the edge here. 

Winner: Unilever

Unilever is the better buy

And there you have it. I don't think investors can go wrong with either stock. P&G is stronger financially, but Unilever edges out P&G on valuation, dividends, and growth expectations. I would go with the maker of Ben & Jerry's.

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John Ballard has no position in any of the stocks mentioned. The Motley Fool is short shares of Procter & Gamble. The Motley Fool has a disclosure policy.