Head to Head: Unilever vs. Reckitt Benckiser

LONDON -- In this series, some of your favorite FTSE 100 (INDEX: ^FTSE  ) shares go head to head in a three-round contest for superiority.

In Round 1, the firms fight on earnings; in Round 2, on dividends; and Round 3 is a battle of the balance sheets. The winner will be the company that has racked up most points at the end of the contest.

Stepping into the ring today are consumer goods giants Unilever (LSE: ULVR.L  ) (NYSE: UL  ) and Reckitt Benckiser (LSE: RB.L  ) .

Fears about the global economy and the sovereign debt crisis in Europe have driven investor demand for defensive companies -- companies that perform reasonably well in all economic conditions -- such as consumer goods groups.

The shares of Unilever and Reckitt Benckiser have outperformed the FTSE 100 index over the last six months. The Footsie has dropped 3%, but Unilever is up 11% and Reckitt Benckiser has risen 6%.

Let's take our seats at ringside.

Round 1: earnings

 

Unilever

Reckitt Benckiser

Recent Share Price (pence) 2,273 3,615
Last Year Price-to-Earnings (P/E) Ratio 18.7 14.5
Current Year Forecast P/E 17.8 14.6
4-Year Average Earnings Per Share (EPS) Growth (%) 3 19
Current Year Forecast EPS Growth (%) 5 -1
Forecast Operating Margin (%) 13 25

Source: Digital Look. Winner in bold.

Reckitt Benckiser comfortably wins the first round with Unilever taking only one of the five points for its superior forecast EPS growth.

The operating margin is something of a reflection of the two companies' different business mixes. Both have big non-durable household goods businesses -- cleaning products and the like -- but Unilever also has a substantial food business (lower margins), while Reckitt has a pharmaceuticals division (higher margins).

But let's not take too much away from Reckitt: The group deserves credit for its industry-leading margins and still out-points Unilever on the other four measures.

Round 2: dividends

 

Unilever

Reckitt Benckiser

Last Year Dividend Yield (%) 3.4 3.5
Current Year Forecast Dividend Yield (%) 3.4 3.6
4-Year Average Dividend Growth (%) 16 24
Current Year Forecast Dividend Growth (%) -1 3
Forecast Dividend Cover 1.7 1.9

Source: Digital Look. Winner in bold.

It's a clean sweep for Reckitt in the second round, although it's close on the yield and dividend cover numbers.

You might be surprised to see negative dividend growth forecast for Unilever. The company's reporting currency is the euro, and the euro-pound exchange rate so far this year has been less favorable for sterling dividends than last year. So, while the dividend may advance year on year in euros, analysts are expecting a weaker year for shareholders who receive their dividends in sterling.

Round 3: balance sheet

 

Unilever

Reckitt Benckiser

Price-to-Book (P/B) Ratio 5.4 4.5
Net Gearing (%) 72 33

Source: Digital Look. Winner in bold.

Reckitt again overpowers Unilever in the final round, resulting in a three-rounds-to-nil win and a score of 11 points to Unilever's one.

Post-match assessment

The contest was not quite as one-sided as the final score suggests. As we saw, Unilever was only narrowly beaten on a few points in the dividend round. Nevertheless, this has to go down as a resounding victory for Reckitt.

Unilever's P/E rating is above its own long-run average and toward the top of its historical range. In contrast, Reckitt's P/E is below its long-run average.

Let me be clear, Unilever is a perfectly good company -- indeed, it was my pick of the sector 18 months ago -- but today's head to head suggests that, at current prices, value has swung away from Unilever and toward Reckitt.

The Motley Fool's top analysts have identified the consumer goods industry as one of three attractive sectors for 2012 and beyond; and each analyst has pinpointed an outstanding company in each sector.

To discover if Reckitt Benckiser, Unilever or another consumer goods group gets our analysts' crown -- as well as the top picks in the two other attractive industries -- grab yourself a copy of the free special report "Top Sectors Of 2012". The report is available for a limited time only, but you can have it in your inbox in seconds simply by clicking here.

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Further investment opportunities

G A Chester owns shares in Reckitt Benckiser but does not own shares in Unilever. Motley Fool newsletter services have recommended buying shares of Unilever. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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