Diageo plc vs Unilever plc vs SABMiller plc: Which Consumer Stock Will Win?

If you can buy only one consumer stock, should it be Diageo plc (LON: DGE), Unilever plc (LON: ULVR) or SABMiller plc (LON: SAB)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

One of the most exciting sectors in which to invest is consumer goods. That’s because, historically, it has offered a potent mix of excellent growth potential and superb defensive qualities, with increases in earnings being backed up by relatively wide economic moats due to a high degree of customer loyalty.

However, the consumer goods sector is being hit very hard at the present time, with the world’s second largest economy, China, enduring a challenging and uncertain period. As such, while the market had taken strong demand from an increasingly wealthy emerging world for granted, it appears as though consumer goods companies will have to work hard to ensure that their brands maintain strong sales momentum.

Clearly, the likes of Diageo (LSE: DGE) and SABMiller (LSE: SAB) have been hit hard by weak demand from China. The two alcoholic beverages companies both reported a decline in earnings in their most recent financial years, with Diageo’s net profit falling by 7% and SABMiller’s declining by 1%. Looking ahead, neither company is due to mount a game changing comeback in the current year, with Diageo’s bottom line forecast to rise by just 3%, while SABMiller’s earnings are expected to decrease by 2%.

Meanwhile, Unilever (LSE: ULVR) has been hit somewhat less hard by the Chinese slowdown. Its bottom line may have increased by just 1% last year, but is expected to increase by 13% this year, followed by further growth of 7% next year. This is partly due to Unilever’s greater diversity of products, with the company selling a range of consumer goods from ice cream to shampoo. Therefore, it may be more resilient than the pure play beverages companies such as Diageo and SABMiller.

Clearly, Diageo and SABMiller have excellent portfolios of brands but many investors will have a hard time justifying their current valuations. For example, the two stocks trade on price to earnings (P/E) ratios of 19 and 21.1 respectively which, given their near-term growth outlook and recent performance, seems somewhat expensive. Unilever, though, may have a similarly high P/E ratio of 20.5 but, with its brighter growth potential, its price to earnings growth (PEG) ratio of 1.6 indicates good value for money.

In addition, Unilever also has far more appealing income prospects than either Diageo or SABMiller. For example, it has a yield of 3.2% versus 2.4% for SABMiller and, while Diageo’s yield is slightly higher than Unilever’s at 3.4%, the latter is expected to raise dividends by 5.6% next year and, looking ahead, its superior outlook is likely to mean faster dividend rises over the medium term, too.

Of course, Diageo and SABMiller are both very high quality companies that have the potential to benefit from a sound long term growth story across emerging markets. They both have excellent brand portfolios and strong management teams but, when compared to Unilever, its greater diversity of products, superior growth prospects and more appealing valuation make it the preferred option of the three at the present time.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Peter Stephens owns shares of Unilever. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Publish Test

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Sed do eiusmod tempor incididunt ut labore et dolore magna aliqua. Ut…

Read more »

Investing Articles

JP P-Press Update Test

Read more »

Investing Articles

JP Test as Author

Test content.

Read more »

Investing Articles

KM Test Post 2

Read more »

Investing Articles

JP Test PP Status

Test content. Test headline

Read more »

Investing Articles

KM Test Post

This is my content.

Read more »

Investing Articles

JP Tag Test

Read more »

Investing Articles

Testing testing one two three

Sample paragraph here, testing, test duplicate

Read more »