Unilever (LSE: ULVR) and Reckitt Benckiser (LSE: RB) are the two giants in the consumer staples space. Between them, they have annual sales in excess of £45 billion and a combined market capitalisation of £135  billion. Both companies have impressive portfolios of well-known brands, which allows them to consistently generate double-digit percentage profit margins and slow, but steady earnings growth.
Is Reckitt the better buy for 2016?
In 2015, Reckitt has been the better performer, with its shares having gained 20% over the past year, compared to Unilever’s more modest rise of 10%. Most of this is due to the faster underlying sales growth from Reckitt, which rose 6% in the first nine months of 2015, compared to Unilever’s 4%.
Future growth for Reckitt will likely come from the consumer healthcare market. Here, Reckitt has already developed some impressive brands, including Nurofen, Gaviscon and Strepsils. Consumer healthcare already accounts for about 32 percent of its sales, and the segment has seen like-for-like sales growth of 13 percent in 2015. This is more than twice as fast as any of Reckitt’s other product segments.
Unfortunately, growth will likely slow as some of its brands may reach saturation. Reckitt would also find it difficult to expand through acquisitions, as a vast majority of consumer healthcare businesses are owned by large healthcare companies. Many of them are unwilling to relinquish control of their stake in the growing industry. And for those few assets that do end up on the market, they fetch a hefty price tag. Bidding competition is typically very intense and valuations could be many multiples on their annual sales.
What is more, Reckitt’s more expensive valuation will likely hold back much further advance in its share price. Its shares trade at 26.1 times forward earnings and carry a prospective dividend yield of just 2.1%.
Is Unilever the better buy for 2016?
Unilever has been held back by its greater exposure to emerging markets. Investor sentiment towards emerging markets will most likely remain firmly out of favour in 2016, but the long-term growth prospects of emerging markets for consumer staples remains intact.
In the meantime, Unilever is making good progress with organic growth, margin expansion and product innovation. These have already offset some of the negative headwinds, and Unilever’s earnings outlook remains robust. In fact, Unilever’s earnings growth will have likely overtaken Reckitt’s in 2015, with analysts expecting Unilever will grow underlying EPS by 9%, compared to Reckitt’s 3%.
While Reckitt’s growth will come from healthcare, Unilever has its own growth engine. Unilever is targeting growth in the growing personal care market, where it has been easier to find reasonably priced acquisitions. Unilever has already acquired four personal care brands in 2015, and more could still be yet to come. It has, so far, bought brands with a niche focus or narrow geographies, meaning there is much potential for Unilever to expand their presence globally.
Reckitt and Unilever are clearly both quality companies, but I think Unilever’s shares have more to offer in 2016. Unilever’s management seems to have done a better job at positioning the company towards future growth opportunities. And in spite of this, its shares are cheaper and offer more dividend value, too. Shares in Unilever trade at a forward P/E of 21.5 and have an attractive prospective dividend yield of 3.0%.