Unilever or Diageo – which consumer giant should be your portfolio bedrock?

Hit hard during the pandemic, these consumer conglomerates are ideal picks for the old investment adage: buy into what you actually use. And indeed, you’d likely lead a pretty sheltered existence if you hadn’t stumbled across either a Unilever (LON:ULVR) or Diageo (LON:DGE) product.

Using the Warren Buffet philosophy of buying into ‘exceptional companies’ – such as his own Berkshire Hathaway – a doubtful, long-term investor can do little better than tucking money into a company which produces a lot of very popular products. But the question that needs to be asked is – of these, which is best?

Two companies, hundreds of brands

The first area of comparison is their brands, which sectors they operate within, and the forecasts for what these areas look like.

On the one hand, Unilever owns brands across homecare, beauty products and foods and beverages, including: Ben and Jerry’s, Knorr, Dove, Bovril, Carte D’Or, Alberto Balsam, Colman’s, Domestos, Lipton, Cif, Hellman’s, Lynx/Axe, Comfort, Persil, Matey, Magnum, Toni & Guy, Sure, Surf, Pure Leaf, Cornetto, Marmite, Radox, Simple, Solero, TRESemme, VO5, Vaseline, Wall’s, Vienetta, PG Tips, Pot Noodle (etc etc).

In effect, they produce most of the products on your corner shop’s shelves. While sales have been ahead of target during 2020, uncertainty has continued to weigh on the company’s share price. Though, while tight purses might affect the extent of purchases in non-essential consumables, a lot of Unilever products in beauty and homecare will be viewed as shopping basket staples, and therefore would likely not be hampered too greatly, even in a COVID risk worst-case-scenario.

On the other hand, we have the alcoholic beverages-specialised Diageo, which owns brands such as: Black & White, Johnnie Walker, J&B, Lagavulin, Singleton, Talisker, and Crown Royal whiskies; Ciroc, Ketel One, and Smirnoff vodkas; Bundaberg, Captain Morgan, and Ron Zacapa rums; Gordon’s and Tanqueray gins; as well as prolific names such as Don Julio tequila, Baileys liqueur and Guinness beer.

With the international closure of hospitality outlets across the world, out-and-about alcoholic beverage sales have been absolutely hammered during 2020. With this painful fall, there are two avenues to consider going forwards. Following its recent share price dip, we might conclude that COVID risk factors will likely prevail until a vaccine is rolled out effectively Рand will continue to weigh on sales. On the other hand, shares rallied in early November, and we might imagine that between being among the worst-affected sectors by the virus, and the pent-up demand for socialising and holidaying, the outlook for Diageo could be promising. Indeed, hopes of normality returning aside РChristmas is coming, and we have to consider how much holiday booze demand has already been priced in by the market.

Which one offers better value?

The second comparison should be on each company’s price, value and income potential.

In terms of share price, both companies have been broadly moving upwards since the start of the first COVID lockdown, with both falling slightly on Monday, with Unilever down 1.68% and Diageo falling 0.91%, to 4,381p and 2,920p respectively.

Analysts have a consensus ‘Hold’ stance on Unilever stock, with 6 Buy, 2 Hold, and 3 Sell stances. Similarly, the company has a consensus target price of 4,819.55p (around a 10% potential increase), with highs of 5,411p from Goldman Sachs analysts and lows of 3,814p courtesy of HSBC – both quoted in October.

Meanwhile, analysts also have a ‘Hold’ stance on Diageo stock, with 10 Buy, 6 Hold and 2 Sell stances. Its consensus target price is 2,969p, some 1.7% up from its current level and contrasting Goldman Sachs’ November target projection of 3,200p, and UBS’ September projection of 2,800p.

In terms of which is better, Diageo received a 56.64% ‘outperform’ prediction from the Marketbeat community, versus Unilever’s 52.27% ‘underperform’ vote share. However, each company has appeared in seven research reports over the last three months – which suggests high interest in both – while Unilever insiders have sold none of the company’s stock in the last ninety days, whereas Diageo insiders sold 1,153% more of the company’s stock than they bought.

This follows Diageo’s recent share price uptick, where it bounced around 530p. And, while selling off stock to capitalise on a boom isn’t inherently negative, it does suggest that insiders found short term maximisation more worthy than the company’s price prospects in the short-to-medium-term. Meanwhile, at its lowest since the start of the month, Unilever stock has been described by many on forums as a bargain.

In terms of value, Unilever also outperforms Diageo. Its p/e ratio of 17.44 is still above the consumer defensive average of 11.49, but far far below Diageo’s 48.99 score.

The story is much the same in terms of income. Unilever boasts a 3.42% dividend yield and a pay-out ratio of 59.27%. Being below 75% or so, this rate stands at a healthy and sustainable level. In contrast, Diageo has a dividend yield of 2.40%. Not shabby, but its pay-out ratio of 116.86% isn’t ideal, as it may be too high to be sustainable – and relied upon.

A mind towards posterity

Our final consideration, which is natural when thinking of a long-term holding, is future strategy and product considerations. In reality, both companies excel in innovation, with both featuring highly trendy brands who capitalise on consumer whims and cultural events.

For instance, Unilever’s Ben & Jerry’s creates new flavours to tap into contemporary tropes (such as Netflix and Chill’d), and performs vocal advocacy on issues such as climate change, BLM and the migrant/refugee crisis (not interchangeable, just depends on the viewer). Meanwhile, Diageo is hardly slacking, having launched the Johnnie Walker ‘White Walker’ to mark the Game of Thrones finale, along with new gin flavours, no-ice-needed Baileys, and a fruit-based Ketel One variety, to adapt with changing consumer taste trends.

In terms of their commitments to sustainability, both companies have set clear targets, with Diageo pledging to be carbon neutral by 2030, while Unilever has for some time reported on its sustainability initiatives, and now targets $1.2 billion in plant-based sales by 2025.

Likely the more ambitious in terms of sustainability goals, Unilever’s push for greener mass production is positive overall – with sustainability being an increasingly factored-in part of the investment process. However, it will alienate some who view this kind of overt messaging to be contrary to their own views – or, ‘virtue signalling’.

Out of the two companies, I’d favour Unilever. Its recovery may not be as dramatic as the one Diageo saw a couple of weeks ago (and may yet see), but its current entry point is comfortable versus where it is expected to move over the coming years. Similarly, it’s less overvalued, pays a bigger dividend and seems to be more decisive in its green transition.

For full disclosure, the author has a holding in Unilever, but this was only after beginning to carry out his research into different consumer defence equities.