P&G Is Betting On Pampers To Pump Up Profits

Innovation doesn't only happen in the tech world; just ask Procter & Gamble (NYSE: PG  ) , the "stodgy" consumer products giant that has been around for over a hundred years. Innovation is actually a key component of its strategy to grow and return value to shareholders.

Pampered Profits
Recent improvements in "diaper technology" might allow the Ohio-based company to boost the profit it makes from its most valuable brand by using a tried and true business practice known as "downsizing."

Starting in mid-September, Procter & Gamble will put fewer but more absorbent diapers in its packages. Pampers, the number one selling brand for the company, targets the premium portion of the market. This will please all those moms and dads out there, as their babies will not have to be changed as often, and they probably won't notice that they are buying fewer diapers. The company plans to keep the retail price steady so revenue will not be adversely affected. And recurring costs will decline as less material is used per package at the same price. The bottom line is that the Pampers bottom line may actually improve and contribute to overall growth.

The company could use some help. Procter & Gamble has been reporting relatively sub-par performance over the past few years , including a modest 4.6% increase in earnings per share over the past year.

In 2012 the company innovated within another of its billion dollar brands, Tide, by releasing a completely new product. The Pod packet was targeted for the high end of the laundry detergent market, and Procter & Gamble reported higher sales and a dominant market share after it was released. 

Same-Sized Huggies
Procter & Gamble competitor Kimberly-Clark (NYSE: KMB  ) has no plans to reduce the number of Huggies, its diaper brand, or raise prices to jump-start growth. However, it does intend to roll out a new initiative on social media designed to increase revenue, which hasn't grown much lately .

The platform is called Pick Up The Values. The company will provide suggestions to shoppers and steer them toward the many consumer products it sells, such as Scott paper towels and Kleenex tissues.

In spite of that slow revenue growth, Kimberly-Clark still manages to pay and increase its dividend year after year, something that Procter & Gamble also does.

Kimberly-Clark's dividend is a hefty $3.24 per share. It has a relatively low payout ratio (66%) and plenty of free cash flow, so increases are likely to continue. The company has a 41-year streak of increases. It is a stock that you should consider. 

Note that Procter & Gamble pays $2.41 a share. It has a similar payout ratio of 59%, and because of initiatives such as the Pampers and Tide innovations, free cash flow growth should be sufficient enough going forward to keep up the dividend increases. The company has a enviable record of 56 years in a row where the payout is increased.

Innovation is just as important in the consumer goods sector as it is in technology.

Procter & Gamble uses it to increase shareholder value and promote growth. It is betting on higher profit from an innovation in Pampers. A new product in the laundry detergent market, Tide Pods, has allowed the company to increase sales in the high end there. 

Rival Kimberly-Clark will use social media to increase revenue for its lineup of products. 

Both stocks appear poised for future revenue and earnings growth because of their forward-looking policies.

Both stocks can be part of an income producing portfolio as well, since they have a solid record of increasing dividends; Procter & Gamble is on a 56-year streak, and Kimberly-Clark isn't far behind at 41 years. Both companies also have free cash flow and payout ratio's that will allow future increases. 

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9/28/2016 4:01 PM
KMB $126.48 Up +0.79 +0.63%
Kimberly-Clark CAPS Rating: ****
PG $89.46 Up +1.10 +1.24%
Procter and Gamble CAPS Rating: ****