As every experienced investor knows, the economy moves in cycles, creating an endless roller coaster of ups and downs. Nowhere is this more true than for companies tied to consumer purchasing.
When times are tough, consumers tend to put major purchases on hold. New cars, large appliances, and expensive vacations are among the first items dropped from household budgets.
Slower sales hurt share prices and company valuations. Fortunately, smart investors know they can offset these losses by diversifying their portfolios to include companies that thrive despite economic conditions.
These companies, collectively known as consumer staples, offer products that are an integral part of day-to-day life. In good times and bad, consumers buy everything from soap to dishwasher detergent. Two of the heavyweights in this sector are Procter & Gamble (NYSE: PG) and Unilever, but which stock is best?
The Basics of Consumer Staples Stocks
The consumer staples sector includes a variety of companies that produce goods and services consumers need even when budgets are tight. For example, food, beverages, personal hygiene items, and household products all fall into this category.
No matter how bad things get, investors can be pretty certain that sales of soap and shampoo will remain steady, though sales of luxury personal items like perfume may decline.
Better still, some consumer staples companies actually experience revenue spikes during lean economic times. Examples include discount food suppliers, dollar stores like Dollar General (NYSE: DG) producers and distributors of alcohol, and even manufacturers of tobacco products.
Investors who purchase shares in consumer staples companies like Procter & Gamble (NYSE: PG) and Unilever generally enjoy lower levels of portfolio volatility.
Though the value of other assets may decrease with a decline in the market, consumer staples are known to experience steady demand and frequently hold their value in good and bad economic climates. As a result, investing in this sector is an attractive option to anyone who puts capital preservation top of their list.
The Pros and Cons of Investing in Consumer Staples
A variety of factors may impact consumer staples companies in upcoming months, though none have to do with the economy as a whole. Some of the pros facing this sector include the following:
Retailers are working hard to improve the value offered by each of their products, which is expected to bring the cost of producing many consumer staples down – and profits up. Competition for dollars in this industry is fierce, thanks to disruptors like the Dollar Shave Club, which upended the shaving industry that was long dominated by Gillette and Schick.
Plus, a variety of merger and acquisitions may be on the horizon in the consumer staples sector. If these mergers and acquisitions take place, the companies involved are likely to improve efficiency and lower production costs further, thereby increasing profits.
Of course, the picture isn’t entirely rosy when it comes to consumer staples. Fierce competition means companies in this sector are lowering prices, which generally translates to lower profits.
Trade disputes are another serious concern in today’s political climate, and it is hard to say how individual companies may be impacted if these issues continue to escalate.
The industry as a whole has not done well in 2018, and stocks have underperformed the market as a whole by 30 percent in the last two years. For those who already own shares in consumer staples companies, the time to sell may have past. Those who don’t yet own these stocks may be able to find some good bargains. After all, consumer staples stocks have a long history of steady increases, making today’s prices look cheap.
The only question that remains is which stock to buy. For many, the choice comes down to two of the industry giants: Procter & Gamble (NYSE: PG) and Unilever.
Should You Invest in Procter & Gamble?
Procter & Gamble (NYSE: PG) has long been a mainstay in the consumer staples sector.
It owns a variety of popular brands, including Luvs, Pampers, Tide, Downy, Bounce, Bounty, Always, Tampax, Mr. Clean, Gillette, Secret, and Crest.
Chances are, you have some of these brands in your home right now.
Investors have purchased shares of Procter & Gamble (NYSE: PG) with complete confidence for decades, knowing that it has a history of sustainable growth and stable dividends.
However, today’s Procter & Gamble isn’t the same company it once was. In fact, increased competition has prevented growth over the past ten years, and now the conglomerate is actually shrinking. It has elected to focus on cleaning and personal care brands where there is already strong brand loyalty – a competitive advantage – and it sold 43 beauty brands that once accounted for more than $10 billion in revenue.
The smaller company now brings in proportionately lower revenue, but Proctor & Gambles profits don’t appear to be suffering. Nonetheless, it doesn’t appear to be the right time to invest. The world’s cleaning and personal care markets are very nearly saturated, and there seems to be little room for the company to grow in the future.
Add to this the very real possibility that disruptors could steal away market share, and you are left with substantial risk if you invest at the current premium price.
Is Unilever Stock Worth Buying?
Unilever, which splits its headquarters between London and Rotterdam, is perhaps the biggest competitor that Procter & Gamble faces.
While Unilever owns more than 400 total brands, its focus is on 13 of its strongest. These include Breyers, Ben & Jerry’s, Dove, Hellmann’s, Axe, and Lipton. Impressively, Unilever acquired the Dollar Shave Club, which is enjoying massive success.
The strategy of concentrating on growing its 13 most valuable brands is proving effective, and Unilever is enjoying improved revenues and better earnings than average for the consumer staples sector.
Speculation of merger or acquisition by other major industry players abounds, and the possibility remains that some or all of the company will eventually be sold to the likes of Kraft Heinz (NASDAQ: KHC), Colgate-Palmolive (NYSE: CL), or Kimberly-Clark (NYSE: KMB).
Unilever has demonstrated its interest in and ability to adapt and change as the marketplace changes.
It has ensured its appeal with the crucial Millennial consumers by acquiring environmentally-focused companies like Seventh Generation, along with niche and boutique personal care and food businesses.
In addition, Unilever is seeking out new revenue streams with innovative products like its recently released Day 2 – a spray that freshens gently worn clothing so that it can be worn a second time before laundering.
Procter & Gamble vs. Unilever: Stock Summary
By the numbers, Procter & Gamble and Unilever are similar, so it is hard to determine which is the better buy from growth rates and P/E valuations. Instead, investors are paying close attention to what the future holds for each company.
While Procter & Gamble has a variety of strong, established brands, there are few signs that the business is poised for growth. In fact, selling off product lines and doubling-down on existing brands appears to be the current strategy.
On the other hand, Unilever is developing creative new products and acquiring popular start-ups in an effort to increase revenues. This indicates that Unilever may be better positioned for long-term success.
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