One might not immediately associate consumer goods companies with innovation. Any discussion regarding innovative companies is usually reserved for the technology sector. But every industry is at risk of disruption due to innovation, and the consumer goods industry is no exception.
While Procter & Gamble (NYSE: PG) is usually the No. 1 stock investors buy in the consumer goods sector, it increasingly looks like a lumbering giant that has lost its innovation. For that reason, investors should look at P&G’s European rival Unilever (NYSE: UL). Unilever stock is the better pick in the consumer goods sector.
P&G Fails to Keep Up
A major risk for consumer goods companies is obsolescence. Over time, products become outdated, and eventually new technologies replace them. There are a few product categories in the consumer goods space that are facing this dilemma; one of them happens to be among P&G’s biggest sellers.
First up are batteries. The old days of clunky remote controls and electronic gadgets that universally require batteries are over. Consumers have had it with batteries; not only are they a pain to have to replace so often, but they are also expensive.
Battery brands like Duracell dominated the marketplace for years, but this is rapidly changing, and that is why P&G sold the Duracell brand to Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) for $4.7 billion in 2014.
The sale of Duracell was part of P&G’s broader divestiture program, in which the company eventually sees itself selling as many as 100 brands before it’s all said and done. This will generate a significant cash windfall for the company. But the problem is this cash will mostly be used to buy back stock.
Share buybacks do help boost future earnings per share, but they don’t help to grow revenue, and that is what P&G needs most. P&G’s total revenue in fiscal 2015 was lower than it was five years ago. By contrast, Unilever has taken a lead on P&G by focusing on innovation to drive revenue growth.
Innovation Fuels Unilever’s Strategic Priorities
While P&G is focused on cutting costs and buying back stock, over the past year Unilever has made a number of acquisitions. It has bought several companies that are shaking up the consumer products industry.
First, Unilever acquired Dollar Shave Club for $1 billion. Not only did this deal give Unilever entry into the highly lucrative shaving market, but it is a direct shot at P&G, which owns Gillette. Due to the fairly steep cost of razors and how quickly they dull, the razor market is ripe for disruption.
In August, Unilever announced it will acquire Blueair, a company that makes innovative mobile indoor air purifiers. Blueair has a significant presence both in the U.S. and international markets like China, Japan, and India. Blueair generated more than $100 million in revenue last year.
Then, Unilever acquired Seventh Generation, maker of natural household cleaners. Seventh Generation’s products are manufactured with sustainability in mind, which includes the use of plant-based detergents and cleaners. Terms of the deal were not immediately disclosed, but this is a significant deal: Seventh Generation booked more than $200 million in revenue last year, and its sales have grown at double-digits each year over the past decade.
Lastly, according to The Wall Street Journal, Unilever has reportedly been in talks to acquire Jessica Alba’s consumer products start-up Honest Co. While terms of any potential deal have not been released, it is believed that the valuation of Honest Co. exceeds $1 billion.
Unilever Stock: Forward Thinking Pays Dividends
For evidence of Unilever’s successful strategy, look no further than its financial results in recent periods. Last year, Unilever’s total revenue rose 10%, along with 14% earnings growth. By comparison, P&G’s revenue excluding currency fluctuations rose just 1% in its most recent fiscal year. Over the first half of 2016, Unilever’s organic revenue is up 5% year over year.
By acquiring Dollar Shave Club, Seventh Generation, Blueair, and possibly Honest Co., Unilever is proving it is serious about innovation. These companies all make products that are growing fast and are poised to disrupt their industries. Unilever’s vision and forward thinking could make Unilever stock a better dividend issue to buy than P&G.