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Why Reckitt Benckiser Group Plc Beats Unilever Plc And Associated British Foods Plc

Last time I took a look at one of the FTSE 1oo sectors, I examined the oil & gas business, and I found it impossible to choose between Royal Dutch Shell and BP.

Today I’m turning to something a little different, and I’m comparing three companies that are technically in two different sectors. They are Unilever (LSE: ULVR) (NYSE: UL.US), Reckitt Benckiser Group (LSE: RB) (NASDAQOTH: RBGLY.US) and Associated British Foods (LSE: ABF), and the reason I’m pitting them against each other is that all three essentially produce consumer goods — and I think they make a good barometer for consumer demand.

 Here’s an overview of some fundamentals:

Company Unilever Reckitt Benckiser Associated British Foods
Market cap £34.3bn £32.6bn £15.3bn
Recent price 2,620p 4,570p 1,933p
Share price growth 16% 28% 50%
Historic EPS growth 10% 7% 18%
Forward EPS growth -2% 0% 11%
Historic P/E 17.2 14.5 14.6
Forward P/E 19.2 17.0 20.0
Historic Dividend 3.5% 3.5% 2.2%
Forward Dividend 3.4% 3.0% 1.6%
Forward Cover 1.5x 1.9x 3.1x

Share price growth is over the past 12 months, historic figures are for the last reported full year, forward figures are for the next forecasts.

First impressions

I’ve been watching all three companies for some time, as I have Unilever in the Fool’s Beginners’ Portfolio watchlist, and they’ve all been looking a bit pricey to me. They’re reasonably defensive shares, so I’m not surprised they’ve been holding their own during the past few years — but they’ve all been soaring since late 2012. But let’s take a look at each:

Unilever

I’ve always liked Unilever as long term investment, and with the exception of a cut in 2009, it has been steadily raising its dividend. Even the 2009 dip was quickly overcome, with the next year’s payment rising to exceed 2008’s. The yield is not great, but at around 3.5% it isn’t bad either. Forecasts are somewhat middling for this year and next, with little real change in overall earnings per share (EPS) expected, but the dividend is expected to carry on creeping up and it should be adequately covered.

But that share price! Granted, it peaked at 2,885p back in May (which gave us a forward P/E of 21) and has fallen 9% since then to 2,620p. But I can’t help thinking we’re in a price-correction phase right now and the share price is likely to disappoint over the next year or two.

Reckitt Benckiser

With hindsight, Reckitt Benckiser would have been a great buy a year ago, but even after a strong share price rise, I think the company edges ahead of Unilever in a number of ways. Firstly, even the crunch year of 2009 didn’t affect its dividend, and we’ve been seeing uninterrupted rises — last year we had a yield of 3.5%. Earnings growth has been steady too, though forecasts do suggest flat EPS this year and a modest 3% rise for 2014. Dividend growth also looks set to slow a bit this year, with a 3% yield predicted.

But, Reckitt Benckiser also scores in that its dividend is significantly better covered that Unilever’s, and the company could afford to pay a similar 3.4% forward yield to Unilever’s while still keep cover above 1.7x. The slightly lower P/E multiple tempts me more too.

Associated British Foods

This brings me to perhaps the must unusual of the three, Associated British Foods, which mostly focuses on grocery, agriculture, sugar and such foodie things. But it also owns retail clothing chain Primark, and it’s Primark that has been driving its recent upbeat trading.

Associated British Foods has been exhibiting growing earnings and dividends just like the other two, and it has the strongest EPS forecasts of the three here — 11% this year, 9% next. But against that, we do have the highest forward P/E by a whisker. And though the dividend is rising and is the best covered of the three, it looks set to provide a yield of only 1.6% — doubling that to the FTSE average of around 3.2 would bring the cover down to Unilever’s 1.5x.

The winner

I have to confess I’d have difficulty plonking down my cash for any of these three at today’s prices, even though I think they’re all great long-term businesses. But if I had to choose one, I’d plump for Reckitt Benckiser, on what I think are slightly better fundamentals — and it also has lower debt than Unilever, though neither carries too much.

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> Alan does not own any shares mentioned in this article. The Motley Fool has recommended shares in Unilever.