Trump P&G With This Dividend Play

Unilever_logoWhen investors think of dividend stocks in the consumer staples sector, Procter & Gamble (NYSE: PG) is usually the first stock that comes to mind. Of course, there is plenty of good reason for this, since P&G is one of the most famous dividend stocks of all time.
P&G has an amazing track record of paying, and raising, its quarterly dividend over the years. In fact, P&G has paid dividends for an astounding 124 consecutive years, dating all the way back to the company’s incorporation in 1890, and it has increased its dividend for 58 consecutive years.
P&G’s status as a “dividend aristocrat” and a solid dividend stock is beyond question. But for aspiring investors looking for the best deal, there’s perhaps a better consumer staples stock than P&G.
Unilever (NYSE: UL) may be a better buy than P&G right now, because of a key strategic advantage that could put it in better position to grow earnings and dividends in the years ahead. The advantage I’m referring to is Unilever’s higher standing in the emerging markets.
Emerging markets are the under-developed nations around that world that are rapidly growing. These countries, including the BRIC nations (Brazil, Russia, India, China) and others, are experiencing economic growth that is well ahead of more mature nations like the United States.
Unilever derives two-thirds of its sales from emerging markets, including China and Brazil. By comparison, P&G is dominant in the U.S., but derives only 39% of its sales from developing nations. P&G has a much stronger position in developed markets, as it generates roughly two-thirds of its own sales from North America and Europe.
This provides P&G with stability, and as a result it is less vulnerable to volatile changes to the global economy. The trade-off is that P&G is having a harder time producing growth. Consider that P&G’s $4.11 earnings per share in 2010 were actually higher than last year’s $4.01 in diluted EPS.
P&G’s lack of growth underscores the importance of taking a leadership position in new geographies, which Unilever has accomplished much more effectively than its larger competitor. Unilever grew emerging markets revenue by 5.7% last year, which was far better than the 0.8% decline in the developed markets. Overall, Unilever grew currency-neutral total sales by 2.9% last year, and increased EPS by 11% in 2014.
One of the factors contributing to Unilever’s strategic advantage is its large food business. While P&G is a pure-play household products company, Unilever has a stable of food brands that are contributing positively to growth. For instance, the Knorr brand is a hit in India and Pakistan, and Unilever saw strong growth from Royco and Bango in Indonesia last year. Meanwhile, P&G does not have a food business.
With higher earnings growth generally comes higher dividend growth as well. I expect Unilever to be able to increase its dividend at higher rates than P&G in the years ahead, based on its higher earnings growth. After all, a company can only increase its dividends if its underlying profits are increasing at similar rates.
Indeed, P&G’s dividend growth has slowed in recent years. P&G increased its dividend by just 6% last year, which was below its 8.5% average dividend growth in the preceding five-year period.
As a result, while P&G is undoubtedly a legend among dividend stocks, there may be a better choice going forward. For income investors looking at the consumer staples space, Unilever could provide better dividend growth than P&G in the future, thanks in no small part to its significant advantage in the emerging markets.

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