Procter & Gamble vs. Colgate-Palmolive: Which Stock is a Better Buy?

The pandemic-driven recession has been a boon to the consumer staples, as panic purchases across the world have led to a shortage of fast-moving consumer goods sold by companies such as The Procter & Gamble Company (PG) and Colgate-Palmolive Company (CL). These recession-proof stocks are well-positioned to soar once again as the second wave of coronavirus hits the US coasts. Despite two positive vaccine developments a couple of days ago, the intensive challenges associated with the commercial roll-out of the vaccine are still keeping investors worried. As a result, CL and PG have once again garnered investor attention.

CL and PG not only provide stability in a tumultuous market but also guarantee consistent returns in the form of dividend payouts every quarter. At a time when Fed interest rates are at an all-time low, with rising unemployment, these stocks are slowly returning to the limelight for their ability to hedge investor portfolios as well as generate stable returns.

Both companies have generated decent returns over the past five years. While PG gained 83.1% over this period, CL returned 28.6%. However, in terms of year-to-date performance, CL is the clear winner with 24% gains versus PG’s 11.7% returns.

But which stock is a better buy now? Let’s find out.

Latest Developments

PG announced a debt tender offer of approximately $2 billion in October, which should reduce the company’s debt and interest burden. This move should also improve total shareholder returns over time.

PG introduced a new sanitizer spray Microban 24 last month, which received emergency authorization from the Environmental Protection Agency (EPA). With a rising number of cases across the United States and Europe, this product should witness significant demand over the next couple of months.

PG has maintained its reputation as one of the most consistent dividend-paying companies in the United States for over 130 years. It recently announced a quarterly dividend payout of $0.79 per share. It currently pays $3.16 annually, which yields 2.3% at the prevailing price.

CL, on the other hand, has focused on its 2025 Sustainability and Social Impact Strategy over the past couple of years. The company’s commitment has been recognized by the 2020 Dow Jones Sustainability Indices (DJSI) for the fourth consecutive year. Moreover, CL has been identified as the top-performing household products company by DJSI for two consecutive years.

CL announced its laboratory test results today, stating the efficacy of mouthwash and toothpaste to neutralize the COVID-19 virus. Colgate Total and Meridol toothpaste and Colgate Plax and Total mouthwashes neutralize 99.9% of the virus, thereby reducing the chances of contracting the disease. At a time when the US is recording record cases of coronavirus each day, CL’s research results should help the company boost toothpaste and mouthwash sales shortly.

CL recently announced a quarterly dividend payout of $0.44. The company pays $1.76 annually, which yields 2.1% based on the current price.

Recent Financial Results

PG’s net sales increased 9% year-over-year to $19.32 billion in the third quarter ended September 2020. Gross profit rose 12% from the year-ago value to $10.18 billion, while EPS increased 20% from the same period last year to $1.69. Net income rose 19% from the prior-year quarter to $4.28 billion.

CL’s net sales increased 5.5% to $4.15 billion in the third quarter ended September 2020, while organic sales rose 7.5% over this period. EPS increased 21% from the year-ago value to $0.81. Gross profit margin increased 220 basis points to 61.2%. CL maintained its global leadership in the toothpaste and toothbrush segment with a market share of 39.9% and 31.1%year-to-date.

Past and Expected Financial Performance

CL’s revenue and EPS increased at CAGRs of 1.9% and 6.5%, respectively, over the past three years. This compares to PG’s revenue and EPS CAGRs of 3.6% and 11.8% over the same period.

CL’s EPS is expected to rise 4.1% in the current quarter, 7.8% in the current year, 5.9% next year, and at a rate of 6.7% per annum over the past five years. Analysts expect revenues to increase by 2.6% in the current quarter, 3.7% in the current year, and 2.7% next year.

In comparison, PG’s EPS is expected to increase 4.9% in the current quarter, 8.6% in the current year, 6.3% next year, and at a rate of 8.5% per annum over the next five years. The consensus revenue estimates indicate a 4.6% rise in the current quarter, 4.5% growth in the current year, and 3.2% improvement next year.

Profitability

PG’s trailing 12-month revenue is 4.48 times what CL generates. However, CL is more profitable with a gross margin of 60.6% compared to PG’s 51.6%.

CL’s ROE and ROA of 457.1% and 15.7% compare favorably with PG’s 28.9% and 9.1%, respectively. CL’s return on total capital of 27.7% is 1,410 basis points higher than PG’s 13.6%.

Thus, CL is a more profitable stock here.

Valuation

In terms of trailing 12-month non-GAAP P/E, CL is currently trading at 28.11x, which is 7.6% more expensive than PG, which is currently trading at 25.97x. CL is also more expensive in terms of forward non-GAAP PEG ratio (4.45x versus 3.11x).

CL’s trailing 12-month Price/Cash flow of 19.46x is slightly more expensive than PG’s 19.27x.

POWR Ratings

Both CL and PG are rated “Strong Buy” in our proprietary POWR Ratings system. Here’s how the four components of overall POWR Rating are graded for each of these stocks:

Both CL and PG have an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. PG is ranked #1 out of 34 stocks in the Consumer Goods industry, while CL is ranked #4 in the same group.

The Winner

While the demand for FMCG products usually remains stable, the second wave of coronavirus has induced people to panic buying mode recently. While both CL and PG are expected to gain from this second wave of pandemic windfall, CL has a slight edge over PG, given its recent developments and laboratory test results of its products. 

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PG shares were trading at $139.80 per share on Friday afternoon, up $0.27 (+0.19%). Year-to-date, PG has gained 14.69%, versus a 12.61% rise in the benchmark S&P 500 index during the same period.

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.

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