There are two companies that are rarely talked about but provide a huge amount of the stuff that we keep in our houses. Whether it's Gillette razors, Pampers diapers, Axe body spray, Lipton's tea, or Q-tips, Procter & Gamble (PG 0.60%) and Unilever (UL -0.17%) provide the lion's share of what's in our cabinets and drawers.
That makes each a worthy candidate for your portfolio, as the recurring revenue from loyal shoppers creates enviable cash streams. Such companies are perfect for a nest egg that will grow over time.
Image source: Getty Images
But which is the better stock to buy today? That's not a question that we can answer with 100% certainty. We can, however, approach the situation from three different angles -- each giving us a better idea of what we're paying for when we buy shares.
Sustainable competitive advantages
If investing over the past decade has taught me anything, it's that there's nothing more important to look at than the sustainable competitive advantages -- or "moat" -- of the companies that I invest in. In its simplest sense, a moat is what keeps customers coming back for more, while keeping the competition at bay for decades.
Both Procter & Gamble and Unilever benefit from the same primary moat: the strength of their brands. Some of the most popular brands from the former include Gillette, Pampers, Crest, Duracell, and Tide. The latter's roster includes personal care products like Dove, Vaseline, and Q-tips, but it also has a strong stable of food products like Ben & Jerry's, Hellman's, Breyers, Klondike bars, and a number of different butter spreads.
Normally, I would just throw my hands up and call this a tie, as both have many strong brands -- and that strength allows the companies to continuously raise their prices while knowing that customers will pay up. Recently, however, I've become convinced that products that we put in our body have a wider moat around them than personal care products.
As such, I'm giving a very slight nod here to Unilever, as I believe customers will be more loyal to their food offerings than Procter & Gamble's customers are to its products.
Winner = Unilever
Financial Fortitude
Both of these companies are dividend-paying conglomerates. Investors usually like to see as much money being returned as possible -- but that's not always in our own best long-term interests.
That's because every company, at one point or another, is going to endure difficult financial times. Those that enter such periods with lots of cash on hand have options: buy back stock, acquire rivals, or outspend the competition to gain long-term market share.
Debt-heavy organizations, on the other hand, are forced to cede this market share in an effort to stay solvent. While that helps them to live another day, it doesn't do much for long-term prospects.
Here's how these two stack up in terms of financial fortitude, keeping in mind that Procter & Gamble is valued at a 45% premium to Unilever.
|
Company |
Cash |
Debt |
Net Income |
Free Cash Flow |
|---|---|---|---|---|
|
P&G |
$14.3 billion |
$16.6 billion |
$15.1 billion |
$9.7 billion |
|
Unilever |
$4.8 billion |
$12.7 billion |
$5.8 billion |
$5.5 billion |
Data source: SEC filings, Yahoo! Finance, Unilever IR. Net income and free cash flow presented on trailing twelve month basis for P&G, Fiscal 2016 for Unilever.
Without a doubt, Procter & Gamble has a healthier balance sheet than Unilever. Even after accounting for the size difference, Procter & Gamble has a better cash-to-debt ratio, and stronger cash flows.
Winner = Procter & Gamble
Valuation
Finally, we have the murky science of valuation. While there's no single metric that can tell you if a stock is cheap or expensive, there are a number of data points we can consult. Here are five that I like to use.
|
Company |
P/E |
P/FCF |
PEG Ratio |
Dividend |
FCF Payout |
|---|---|---|---|---|---|
|
P&G |
23 |
23 |
3.8 |
3.1% |
75% |
|
Unilever |
26 |
28 |
2.1 |
2.8% |
74% |
Data source: Yahoo! Finance, E*Trade. Morningstar. P/E calculated using non-GAAP earnings when possible. Fiscal 2016 figures used for Unilver.
We have a mixed bag here. Procter & Gamble appears slightly cheaper on an earnings and free-cash-flow basis, while it seems 80% more expensive when growth potential (PEG Ratio) is taken into consideration.
Both companies offer solid dividends, and have used almost identical amounts of free cash flow to make these quarterly payments. On the whole, I'm calling this one a tie.
Winner = Tie
My winner is...
So there you have it: we have a draw. Unilever has the stronger moat by dint of its food focus, while Procter & Gamble has a stronger balance sheet. Whenever this happens, I always side with the company that has a stronger moat. In this case, that means Unilever.
