Both groups own portfolios of billion-dollar brands, which have solid global followings. They also spend significant amounts of money on marketing and research and development, which only reinforces their competitive advantages.
On top of these factors, the two enterprises are also returning cash to investors. Both have attractive dividend yields and are buying back shares. By repurchasing shares, the companies can then drive earnings per share higher, increasing each share’s value.
For these reasons, I own both Diageo and Unilever shares. But if I had to pick just one of the two firms to buy, which would I add to my portfolio?
Size and diversification
Diageo and Unilever share similar qualities, but they both manufacture different products.
Diageo’s portfolio is entirely focused on alcoholic beverage brands. Meanwhile, Unilever’s offering extends from tea to ice cream, vegan sausages and shampoo. I think this means the portfolio is far more diversified. It may also be more acceptable for investors who don’t want any exposure to alcohol in their portfolios.
Indeed, due to the health effects of excessive alcohol consumption, there will always be a risk that governments may ban the company’s products in some markets. This has happened over the past 12 months. While the circumstances have been exceptional, the bans show how real this risk can be.
That’s not to say that Unilever doesn’t face its own challenges. The company has attracted criticism for its environmental track record. It’s also trying to move away from unhealthy foods by investing more in vegan and healthy products.
Nevertheless, I believe, overall, the company’s portfolio comes with less risk.
Unilever share price opportunity
For the reasons outlined above, I’m inclined to say that if I had to pick between Unilever and Diageo, I’d choose the former.
It also looks more attractive from an income and valuation perspective. Unilever currently offers a dividend yield of 3.4%, compared to Diageo’s yield of 2%.
What’s more, the drinks company is trading at a forward price-to-earnings (P/E) multiple of nearly 30. Unilever is trading at a forward P/E of 20.
While a lower valuation doesn’t guarantee better performance, I think these numbers show the consumer goods giant is the better investment at current levels.
The Unilever share price also appears to offer a higher level of income although, once again, this isn’t guaranteed. If the company suffers from a significant decline in sales, it may have to cut the distribution to fund spending elsewhere in the business.
Overall, if I had to buy just one of these companies for my portfolio today, I’d stick with Unilever.
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Rupert Hargreaves owns shares of Diageo and Unilever. The Motley Fool UK has recommended Diageo and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.