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Why I’d buy Unilever plc over PZ Cussons plc after full-year results

Household goods leviathan Unilever (LSE: ULVR) has seen its share price drop lower on Thursday following disappointing full-year financials. The stock was last dealing 5% lower, at six-week lows.

While underlying sales rose 3.7% during 2016, revenues cooled to just 2.2% during the final three months of the year, as broader economic troubles in Unilever’s key Brazilian and Indian markets weighed.

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And chief executive Paul Polman warned that “the tough market conditions which made the end of the year particularly challenging are likely to continue in the first half of 2017,” adding that “we expect a slow start with growth improving as the year progresses.”

On the plus side, however, today’s results underlined Unilever’s resilience in the face of turbulence in its territories, not to mention an environment of unfavourable currency movements.

Indeed, the company still grew sales ahead of the wider market in 2016, with volume and price increasing 0.9% and 2.8% respectively. And Unilever’s commitment to margin improvement helped power 2016 pre-tax profit 4% higher year-on-year, to €7.47bn.

Sales sirens

Unilever is not the only consumer products play to find itself on the defensive this week, with a similarly-disappointing update from PZ Cussons (LSE: PZC) prompting investors to head to the exits.

The Morning Fresh and Imperial Leather manufacturer also slumped to its cheapest since early December, after advising on Tuesday that like-for-like revenues had dipped 2.6% during June-November. This forced pre-tax profit to career 37.8% lower from the corresponding 2015 period, falling to £24.9m.

While performance in Europe was described as “robust,” sales at PZ Cussons were crimped by the impact of severe currency devaluation in its key Nigerian marketplace. And “tough” trading conditions in Australia also hassled the top line.

PZ Cussons maintained its full-year guidance, however, and said that it expects new product launches and revamps to existing labels to keep driving market share higher during the final half.

Which is better?

Unilever’s reputation as a reliable earnings deliverer is not anticipated to lose its sheen any time soon, in spite of current troubles in its core markets. The City expects Unilever to print earnings advances of 10% and 9% in 2017 and 2018, respectively.

By comparison, forecasts at PZ Cussons are less impressive, with the company expected to endure a 1% earnings decline in the period to May 2017 before rebounding with an 8% increase next year.

Unilever is slightly more expensive than PZ Cussons on an earnings basis, however. For the current period a P/E ratio of 18.3 times is in attendance, whereas its consumer goods peer deals on a multiple of 17.6 times.

But Unilever outstrips PZ Cussons on the dividend front, boasting a 3.6% forward yield versus 3% for its rival.

I believe both PZ Cussons and Unilever have the potential to deliver splendid long-term shareholder returns thanks to the star power of their labels and heavy emerging market focus.

Having said that, I believe Unilever is the better pick at present, its wider geographical reach and arguably-stronger product stable — not to mention its extensive efficiency drive — providing it with better earnings protection.

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

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