Colgate-Palmolive is, to oversimplify only slightly, a better company than Procter & Gamble. Colgate's organic sales growth during the past two years has averaged just under 5 per cent, against P&G's 3.5 per cent. Colgate's operating margins are consistently higher than its larger rival's, it has a deeper presence in emerging markets, and its returns on invested capital are considerably higher.
It stands to reason, then, that the stocks of the two consumer goods companies have performed differently. Total return on Colgate's shares during the past decade is about 150 per cent; on P&G's about 100 per cent.
P&G has played a bit of catch-up in recent days, however. Last week it reported fourth-quarter earnings that were far short of inspiring but better than expected and an improvement on the third quarter. And the presence of activist investors on its shareholder register continues to inspire hopes of improved productivity. On Thursday, Colgate revealed its own unexciting numbers. Organic sales growth, in particular, was disappointing, almost as slow as P&G's.
The net impact: In the past week P&G's shares have outperformed Colgate's by more than 8 per cent. The valuations of the two companies are in lockstep, and neither is cheap, at 18 times forward earnings. The similar ratings might seem odd, given that Colgate continues to expect more growth than P&G. The two companies' growth rates were as close as they were in the most recent quarter only because Colgate was hit by a labour dispute in Venezuela.
It would seem that the market is betting that profit growth at P&G must be higher in the long run because the company has more room to cut costs – reversing the old notion that a bird in hand is preferable to one in the bush. At a moment when investors appear to be seeking out risk of all sorts, this should not be surprising.