Head To Head: Unilever vs Reckitt Benckiser

Published in Investing on 28 August 2012

Which consumer goods giant should you buy today?

In this series, some of your favourite FTSE 100 (UKX) 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) (NYSE: UL.US) and Reckitt Benckiser (LSE: RB).

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

 UnileverReckitt Benckiser
Recent share price2,273p3,615p
Last year price-to-earnings (P/E) ratio18.714.5
Current year forecast P/E17.814.6
Four-year average earnings per share (eps) growth (%)319
Current year forecast eps growth (%)5-1
Forecast operating margin (%)1325

Source: Digital Look. Winners 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

 UnileverReckitt Benckiser
Last year dividend yield (%)3.43.5
Current year forecast dividend yield (%)3.43.6
Four-year average dividend growth (%)1624
Current year forecast dividend growth (%)-13
Forecast dividend cover1.71.9

Source: Digital Look. Winners 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 favourable 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

 UnileverReckitt Benckiser
Price-to-book (P/B) ratio5.44.5
Net gearing (%)7233

Source: Digital Look. Winners 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 towards 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 towards 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 analyst's 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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> G A Chester owns shares in Reckitt Benckiser but does not own shares in Unilever.

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goodlifer 29 Aug 2012 , 3:41pm

Two very nice ones to own, but much too pricey for cheapskates like me to buy.

Currently hold no ULVR.

Seriously thinking of taking a profit on RB, particularly now it's xd.

Seem to be plenty of better value, better yield stocks available at more sensible prices, eg VOD, RDSB, SBRY or even GLEN.

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