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This Stock's Recent Drop Is an Opportunity

Thursday - 5/2/2013, 3:23pm  ET

Recently, consumer goods giant Procter & Gamble  reported an increase in profit in its third-quarter results, but it came with a disappointing fourth-quarter forecast. Thus, its share price experienced a significant drop, declining from $82.50 per share to around $77 per share.

However, even with that drop, P&G has had a nice rally of more than 13.5% since the beginning of the year. Should investors accumulate P&G’s shares after the recent drop in its share price? Let’s find out.

A quarter with decent growth

In the third quarter, P&G generated nearly $20.6 billion in revenue, 2% higher than the third quarter last year. Net income came in at $2.59 billion, or $0.88 per share, 7% higher compared to $2.47 billion, or $0.82 per share, in the same time last year. The company reported that its core EPS was higher at $0.99, excluding the restructuring charges of $0.03 per share and a $0.08 per share charge due to the devaluation of the Venezuelan currency in February.

Operating cash flow came in at around $3.9 billion. In the third quarter, P&G returned $2.6 billion to shareholders, including $1.6 billion as dividend and $1 billion through share repurchases. The quarterly dividend was increased 7%, while the company raised its share buyback target to around $6 billion for the fiscal year.

But the guidance does not satisfy Wall Street

However, P&G’s fourth-quarter forecast did not meet analysts’ expectations. While analysts estimated its fourth-quarter profit to be around $0.82 per share, P&G expects fourth-quarter profit to be around $0.69 to $0.77 per share. For the full year, while analysts’ expectation was $4.37 per share, P&G’s guidance for its full year stayed in the range of $3.96 to $4.04 per share.

Unilever bets its growth on emerging markets

As P&G derived nearly two-thirds of its revenue from the developed markets, the company has been hit by the slowdown in the developed markets. In contrast, its peer, Unilever , generated most of its revenue, around 55%, from the emerging markets.

For the past four years, Unilever has experienced decent top line growth, from €40 billion to around €51 billion, as well as growth in every geographical sector. The emerging geographical sector, Asia/AMER/RUB, experienced the fastest growth of 10.6%, while Americas and Europe grew 7.9% and 0.8%, respectively.

Indeed, Unilever has been quite successful in restructuring its brand portfolio under the leadership of CEO Paul Poleman. The company has exited several food businesses, including its North American Frozen Foods business and Skippy peanut butter, and shifted its focus to Beauty & Personal Care segment in the emerging markets. Moreover, Unilever adopted a more decentralized business structure than P&G, thus, it could adjust quickly to local needs & demands.

At $43 per share, Unilever is worth around $120.9 billion on the market. The market values Unilever at around 12.44 times EV/EBITDA. Interestingly, Unilever is valued a bit more expensively than P&G. P&G is trading at $77 per share, with a total market cap of $210.6 billion. P&G has a higher EV multiple of 12.7.

Colgate-Palmolive – a global leader in toothpaste and toothbrush

When talking about giant players in fast moving consumer goods industry, everybody would mention about Unilever, P&G, and Colgate-Palmolive . Colgate-Palmolive has secured its global leading position in the toothpaste and toothbrush market, with several brands including Colgate Total, Colgate Max Fresh, and Colgate Optic White, operating in more than 200 countries.

Interestingly, most of its operating profit, $1.43 billion in 2012, or 36.7% of the total operating profit, was generated from Latin America while Greater Asia/Africa contributed only $886 million in profit. At $119 per share, Colgate-Palmolive is worth around $55.65 billion on the market. The market values the company the most expensively among the three, at nearly 13.7 times EV/EBITDA.

Income investors must love all three companies mentioned above with their uninterrupted increasing dividends for several decades. Currently, Unilever offers shareholders the most juicy dividend yield at 3.1%. P&G’s dividend yield comes quite close at 3%. Colgate-Palmolive pays the lowest dividend yield at 2.3%.

What might interest investors is that Colgate has been paying uninterrupted dividends since 1895. P&G has been paying consistent dividends since 1890 while Unilever started its uninterrupted dividend payment in 1937.

My Foolish take

Indeed, all three global consumer giants are worth holding in the income portfolios of every investor. With global leading positions in personal care, oral care, beauty, and home care, investors could get a good sleep at night when investing in these three companies. Moreover, we could feel safe with the terrific historical record of uninterrupted dividend payments of Unilever, P&G, and Colgate-Palmolive. 

This article was originally published as This Stock's Recent Drop Is an Opportunityon Fool.com

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