Don't Buy P&G, Buy These Two European Dividend Stocks Instead

| About: The Procter (PG)

Summary

P&G is frequently the default dividend stock choice in the consumer goods sector.

But P&G is a bloated company with too many under-performing brands. It is undergoing a difficult and lengthy turnaround to correct this, but revenue is still in decline.

By comparison, Unilever and Nestle are benefiting from the strengthening U.S. dollar, and they have a big lead in the emerging markets.

Unilever and Nestle also offer 3% dividends like P&G, but with a lot more growth, which makes them better picks for income investors than P&G.

When income investors consider buying stocks in the consumer staples space, one name typically comes to mind: Procter & Gamble (NYSE:PG). P&G is the world's largest consumer products company, generating $70 billion in annual sales and a portfolio of well-known brands including Tide, Bounty, Pampers, Gillette, and many more. P&G is also a favorite holding for dividend investors. The company has raised its dividend for 59 years in a row.

But while most investors are well-aware of P&G's accolades, it's also a company facing significant challenges. Most prominently, the strengthening U.S. dollar is wiping out several percentage points of growth for large multinational companies such as P&G. But some of P&G's woes are self-inflicted. It has so many brands that it's become unfocused, and even its core brands like Gillette are facing significant competitive threats.

P&G's stagnating earnings have affected its dividend growth, which has ground to a halt in recent years. For all these reasons, I believe two European consumer products companies - Nestle (OTCPK:NSRGY) and Unilever plc (NYSE:UL) - are better dividend stocks to buy right now.

P&G: A Lumbering Giant

P&G's revenue and earnings have been in a prolonged downturn. Revenue fell 9% last quarter, while organic revenue, which strips out currency fluctuations and divestitures, rose just 2%. Within the organic sales increase, growth was due entirely to 3% price increases. Organic shipment volumes actually declined 2%. While it's a good sign that P&G can still exercise pricing power, it is facing serious competitive threats to worry about, most concerning of which is the rise of Dollar Shave Club, which offers razors for much lower prices than traditional retailers.

P&G is selling off dozens of brands to streamline itself. Investors likely recall the sale of the Duracell battery brand, as well as the sale of 43 beauty brands last year. In all, P&G intends to sell as many of half of its brands. This is a step in the right direction, but P&G's remaining brands still face competition. Last quarter, four of P&G's five operating segments-Beauty, Grooming, Health Care, and Baby/Feminine/Family Care-posted declining organic shipment volumes, even after excluding the effects of divestitures. The best-performing segment was Fabric Care, which only managed flat organic volumes.

The situation isn't likely to improve much this year for P&G. When it announced fiscal second-quarter earnings, the company projected core earnings to decline 3%-8% for the full fiscal year. That is worse than previous expectations of flat-to-down slightly earnings. Currency is expected to wipe out another $0.37 per share in core EPS this year, compared to P&G's prior expectations of an $0.11 per share headwind.

By comparison, Nestle and Unilever are firing on all cylinders right now. Their organic growth is much more impressive than P&G's, and they are actually benefiting from the strengthening U.S. dollar.

Nestle and Unilever: Two Key Advantages

While P&G struggles to get its turnaround together, Nestle and Unilever thrived last year. The first major advantage working in their favor is outstanding growth in the emerging markets. Nestle generates slightly less than half of its total revenue from emerging markets, while Unilever derives nearly two-thirds of its sales from emerging markets, such as China and Brazil. Unilever's sales in the emerging markets rose 7% last year. Nestle's emerging market sales were up 6.8% in the first three quarters of the year. They have staked out big leads in the emerging markets, which will be difficult for P&G to catch up to.

The second major advantage for Nestle and Unilever is currency. The financial media has obsessed over the damage being done to U.S. multi-nationals from foreign exchange. But the reverse is true for internationally-based companies. The rising U.S. dollar is actually a tailwind for them, and their strong earnings growth reflects this. Unilever's total sales rose 10% last year and earnings per share grew 14% year over year. These are very strong growth rates for a consumer staples company, and its growth was due to 2% increases in both average prices and organic shipment volumes.

Similarly, Nestle has also done well to start 2015. In the first three quarters combined, organic sales increased 4% overall. This was due to 2% volume growth and 2% price increases.

Conclusion

Income investors key on P&G for its status as a Dividend Aristocrat and its 3% dividend yield. Nestle and Unilever yield around 3% as well, and these two are benefiting from the foreign exchange environment that is hurting P&G. In addition, Unilever and Nestle have food businesses that provide valuable stability, while P&G does not. Lastly, P&G is facing huge competition from Dollar Shave Club, which threatens its Gillette business.

Nestle's and Unilever's fundamentals are in great shape, and they are taking big leads in emerging markets, which have much more growth potential than mature markets such as the U.S. where P&G dominates. As a result, I believe both growth and income investors should favor Europe-based Nestle and Unilever over P&G.

Disclaimer: This article represents the opinion of the author, who is not a licensed financial advisor. This article is intended for informational and educational purposes only, and should not be construed as investment advice to any particular individual. Readers should perform their own due diligence before making any investment decisions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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