Why I’d buy Diageo plc instead of PZ Cussons plc after today’s update

Consumer goods company PZ Cussons (LSE: PZC) has released an upbeat trading statement today. It shows that the company is making progress. However, I’d still rather buy drinks giant Diageo (LSE: DGE). Here’s why.

PZ Cussons enjoyed a robust performance in Africa across personal care, home care, electricals and food and nutrition in the period from 1 June to 27 September. This followed the introduction of a new flexible exchange rate regime in Nigeria, which led to a 40% devaluation of the local currency, naira. Despite some improvements in liquidity, the currency has continued to weaken on both interbank and secondary markets.

But this shows that while PZ Cussons has excellent long-term potential in Nigeria, it has an uncertain near-term outlook. Due to the firm’s reliance on that country, its risk is higher than for some other consumer goods companies that are also geographically diversified but with a more equal spread between different geographies.

PZ Cussons’ performance in Asia was positive even though Australia continues to offer a challenging outlook. Alongside strong US sales, this helped to offset some disappointment in the UK where a poor summer held back sales of St Tropez products. However, the UK performance of PZ Cussons washing and bathing products was robust across its brand portfolio.

Reduced risk

As mentioned, the company is heavily reliant on Nigeria for future growth. This differs from consumer goods companies such as Diageo, which are more evenly spread in terms of their geographic exposure. This means that Diageo is less reliant on one region for its growth, which lessens its overall risk and makes it more attractive.

Furthermore, Diageo has superior growth prospects compared to PZ Cussons. Its bottom line is forecast to rise by 15% in the current year, while for PZ Cussons the figure is minus 1%. This makes Diageo’s higher price-to-earnings (P/E) ratio of 24.9 more appealing than PZ Cussons’ P/E ratio of 21.3. That’s because it equates to a price-to-earnings growth (PEG) ratio of 1.7 for Diageo, while PZ Cussons’ P/E ratio is forecast to increase over the next year if it meets current guidance.

Diageo also has superior income prospects to PZ Cussons. The former yields 2.8% while the latter has a yield of 2.3%. Furthermore, Diageo’s dividends are covered a healthy 1.6 times. When combined with its upbeat earnings growth outlook, this indicates that dividend increases could be brisk. Meanwhile, PZ Cussons’ dividends are covered twice by profit but may not rise as quickly as Diageo’s thanks to a less positive profit outlook.

While PZ Cussons is financially sound and has strong long-term growth prospects from Nigeria and its other regions, Diageo offers a superior risk/reward ratio. I believe its greater geographic diversity, better growth prospects, lower valuation and higher yield make it a better buy than its consumer goods peer.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of PZ Cussons. The Motley Fool UK has recommended Diageo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.