Both Procter & Gamble Co. (NYSE:PG) and Unilever plc (NYSE:UL) are prized by investors for their relative safety and generous dividends. As established consumer goods conglomerates, which between them sell everything from mayonnaise to diapers, the two companies provide a measure of safety against riskier holdings in investors' stock portfolios.
Recent sluggish global consumption trends have forced both companies to rethink their operating assumptions, and both have instituted significant change over the last two years -- although they've chosen markedly different paths. These decisions will inform our conclusion in this edition of The Motley Fool's "better buy" series.
Before discussing Procter & Gamble's and Unilever's business strategies, however, let's review their financial metrics to get a sense of how they compare. Note that since Unilever only releases full financial statements at mid-year and year-end, the following table is based on both organizations' trailin-12-month performance and balance sheet data as of June 30, 2016:
|Metric||Procter & Gamble||Unilever|
|Revenue||$65.3 billion||$58.5 billion|
|Operating income||$13.4 billion||$8.4 billion|
|Net profit||$10.5 billion||$5.5 billion|
|Operating cash flow||$15.4 billion||$9.1 billion|
|Debt to equity||0.53||1.08|
|Forward PE ratio||19.7||18.9|
The first few metrics reveal marked differences. Procter & Gamble recorded 12% more revenue than Unilever during the 12-month period. It also enjoyed a higher operating margin of roughly 6 percentage points, as well as a higher net profit margin of approximately 6.5 percentage points.
These advantages allowed P&G to deliver nearly double Unilever's net profit in absolute dollars, booking $10.5 billion in net profit versus $5.5 billion for Unilever. Procter & Gamble's margin advantage translates into higher operating cash flow, as it produced nearly 70% more operating cash than Unilever during the period.
If you're wondering about currency effects on the comparison, Unilever reports its earnings in euros, while P&G reports in U.S. dollars. During the 12-month measurement period, however, the net dollar-to-euro exchange rate shifted less than one-half a percent, albeit with a fair amount of fluctuation in between.
As for liquidity, Procter & Gamble has gradually improved its working capital position over the last several years, and has an acceptable current ratio of just over 1.0, meaning that it holds slightly more in current assets than it's obligated for in current liabilities. Unilever doesn't enjoy quite as high a current ratio.
A similar outcome is found when comparing solvency (a corporation's ability to pay long-term debt). While neither company can be said to have a solvency problem, P&G's debt-to-equity ratio of 0.53 is preferable to Unilever's ratio, in which long-term debt of $16.4 billion slightly exceeds total equity of $15.1 billion.
The last few measures demonstrate some of the similarities between P&G and Unilever. Both offer significant dividends with rich yields, making them popular with dividend investors, and both pay out roughly three-quarters of net income in the form of dividends. They also bear fairly similar forward price-to-earnings valuations: Investors pay between 19 and 20 times one-year earnings per share for each of the two competitors.
What differentiates P&G and Unilever
As I mentioned above, consumer goods companies which compete globally are grappling with crimped consumer spending in a lukewarm economic environment. Over the last two trailing years, P&G and Unilever have each seen a total revenue decline of roughly 7%.
Unilever has dealt with curbed growth by focusing on portfolio innovation, revenue management strategies, zero-based budgeting, and "Connected 4 Growth," a type of organizational change described by CEO Paul Polman as an initiative which will make Unilever "more agile, lower cost, and more efficient."
The Netherlands and U.K. dual-domiciled company has also shown a willingness to experiment with sales. An example is its $1 billion acquisition of Dollar Shave Club, the subscription-based razor blade and men's grooming company. This purchase will assist Unilever in competing more effectively in the male shaving market with P&G, which owns blade giant Gillette. It will also help Unilever decrease its learning curve in offering more direct-to-consumer online retail sales.
Procter & Gamble has taken quite a different path in responding to revenue challenges, choosing to trim its portfolio down to 65 brands within 10 product categories. Over the past two years, the company has exited a total of 55 brands, with 50 more currently to be sold or discontinued. Yet these 105 brands represented only 6% of annual profit. The 10 remaining business units have historically grown at a faster pace, and with a higher margin, than overall company growth. During the company's most recent earnings call, management reiterated that it looked to maintain a market leadership position (i.e., No. 1 or 2) in each of the 10 categories going forward.
It's this broader stroke which ultimately lends P&G more potential for stock price appreciation in the near term. Unilever is enjoying fairly decent organic growth -- organic revenue is up 4.2% during the first nine months of the current fiscal year. Unilever's mission is to sustain this momentum while increasing operating leverage.
Procter & Gamble, on the other hand, has experienced fairly disappointing organic growth over several quarters. But by dispensing with lower-growth brands and product lines, the path of least resistance may be clearing. After achieving organic revenue growth of just one-half of 1% during fiscal 2016, which concluded in June, P&G reported an organic revenue increase of 3% in Q1 2017.
In sum, one can make a persuasive case to park money in either of these blue-chip conglomerates. But as our analysis reveals, P&G has one inherent edge in the form of higher operating margins. Moreover, for the next two- to three-year period, unless conditions change, Procter & Gamble's recent product trim will prove a greater catalyst for outperformance than the initiatives currently found in Unilever's playbook.