Most consumers -- particularly in the United States -- know Procter & Gamble (PG 0.60%) pretty well -- or at least its product line. The company owns an array of leading brands like Pampers diapers, Tide detergent, and Gillette razors, just to name a few. The consumer staples name sells goods people use over and over again, under names they are loyal to.
Netherlands-based Unilever (UN) is no different in that regard, even if some of its brands aren't quite as familiar to Americans. Outside the United States, Unilever's Coral laundry detergent, Lifebuoy shampoo, and Solero ice cream treats are well-loved, while within the U.S. the company does well with goods like Pure Leaf tea, Jif peanut butter, and Q-Tips cotton swabs. While Procter & Gamble is the bigger name, the two organizations are more alike than different.
However, there are three key differences between them right now that make P&G the better pick for investors.
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Procter & Gamble rebuild in progress
It arguably shouldn't matter, but to the extent that investors are willing to pay a premium price for a turnaround story, Procter & Gamble shares may be catching more than its fair share of a tailwind.
The saga started in earnest back in 2015, when CEO David Taylor took the helm from A.G. Lafley. Taylor's first task was to continue a two-pronged program that Lafley had started the year before -- shed units that were more distractions than growth prospects, and improve the divisions the company planned to keep. For instance, in 2014 the company sold its bleach business and its pet food unit. In 2016, it went on to sell most of its beauty business to Coty. Other divestitures of lesser brands made less news, such as the sale of Duracell batteries to Berkshire Hathaway in 2016, and the 2015 sale of P&G's Wash & Go haircare lines.
It's difficult to determine if Procter & Gamble's narrower focus is the overarching reason the company is doing better now, but there's no denying it is doing better. In 2019, the top line rose just 1% and profits were down thanks to an $8.3 billion impairment/goodwill charge. However, strip out the impact of divestitures and non-cash accounting charges, and organic sales were up 7% while organic sales volume grew 3%. Adjusted operating cash flow was up about 3% to $15.2 billion. Not bad for a company as big as P&G.
Data source: Thomson Reuters/Refinitiv. Chart by the author.
Also bear in mind that those recent numbers were impacted by the U.S.-China trade wars and tariffs that have dragged on international trade for a couple of years now, and that P&G is still adjusting to a new, slimmed-down structure jostled into place by activist investor Nelson Peltz. All things considered, last year's growth was pretty impressive given all the new distractions that replaced the ones that the company shed.
Procter & Gamble is largely a U.S. company
The COVID-19 pandemic is a worldwide problem to be sure. Some countries and continents are better prepared than others to drive an economic recovery, however. The United States is arguably best positioned to rebound, even if only by virtue of being the most willing and able to go deeper into debt to do so. That bodes well for Procter & Gamble, which derives more than 40% of its revenue from the United States.
Remember, while the U.S. economy was booming in 2018 and 2019 with healthy GDP growth of 2.9% and 2.3% (respectively), that was a localized phenomenon. Europe's GDP growth in 2019 was a paltry 1.6%, according to IMF data, and though China was experiencing faster economic growth, its 2019 GDP growth had slowed to a decade low. South America was headed into the coronavirus pandemic on the defensive too -- its GDP contracted in 2019.
That matters. See, Unilever is far more dependent on Asia, Africa, and the Middle East than P&G is -- nearly half of its sales come from those markets. A little over 20% of Unilever's revenue comes from Europe, while slightly over 30% comes from North and South America.
Those differences were already starting to show up on Unilever's bottom line. For instance, sales growth for its Asia and Middle East arm fell to a five-quarter low of 2.1% in the last quarter of 2019, while sales in Europe fell by 0.8%.
The consumer-driven economy of the U.S. is likely to lead the world back out of this downturn simply because it was healthier headed into it.
Scale, geography create efficiencies
Finally, both companies have not only reliably paid their targeted dividends, but they've also increased them. A decade ago, Unilever was paying 0.208 euros per share per quarter, and as of this year, its quarterly payout per share stands at 0.4104 euros. Procter and Gamble's dividend now stands at $0.7907 per share per quarter, versus $0.4818 in the middle of 2010. Unilever has technically improved its payout at a faster pace, making its current dividend yield of 3.5% even more compelling than Procter & Gamble's 2.8%.
There's more to the matter than just dividend payouts, however. Consider profit margins, for example. P&G simply makes more cost-effective use of what it spends. Last fiscal year's adjusted operating margins of 21% were an improvement on 2018's figure of 20.5% and in line with 2017's 21.5%. Unilever, on the other hand, reported operating income margins of 19.1% in 2019, up slightly from 2018's 18.6%. The difference seems slight on the surface, but multiplied across billions of dollars worth of sales, it adds up significantly, especially during troubled economic times. And profitability is especially important in low-margin businesses like consumables.
The difference in their profitability is largely a result of their relative scales and locations, by the way. Procter & Gamble did almost $68 billion worth of business last fiscal year, versus Unilever's top line of $52 billion euros (about $58 billion). With a bigger business and more centralized operations within its core U.S. market, P&G has an easier time turning sales into earnings.
