In a testament to the stability of their consumer products businesses, both Procter & Gamble (PG +0.17%) and Kimberly-Clark (KMB 0.43%) boast hefty dividend yields. Each payout also has a long enough streak of annual pay raises that investors don't need to worry about the next recession forcing a surprise cut.
The two stocks aren't interchangeable as income investments, though. Let's look at a few reasons P&G makes the stronger dividend stock today.
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1. Improving sales
Their industry has been bouncing along at near zero growth lately, which helps explain why neither company is enjoying robust gains these days. Yet P&G is expanding at a better pace than its chief diaper rival.
Its organic sales sped up to a 2% pace in the most recent fiscal year, while Kimberly-Clark suffered a slowdown to 1%. The momentum gap is continuing into 2017, too. In late July, Kimberly-Clark lowered its outlook for the second straight time and is now projecting roughly flat organic sales. P&G's management team, meanwhile, is forecasting a second consecutive year of accelerating growth.
P&G still hasn't solved its broader market share problem, but by axing out roughly 100 underperforming brands, it has a portfolio that's set to post stronger growth through a balanced mix of volume and pricing gains.
2. Better profits
P&G has been more aggressive than Kimberly-Clark at slicing costs from its business, too. It removed $10 billion from its expense burden over the last five years and is targeting a further $10 billion of savings by fiscal 2019. Kimberly-Clark is benefiting from a cost-cutting initiative that's on track to save the company over $400 million this year, but management isn't engaged in anything approaching the comprehensive transformation P&G is following.
The results of that focus gap shine through in the two companies' relative profitability. P&G's operating margin has risen by two full percentage points since 2012 and is comfortably above 21%, to put it near the top of the industry, while Kimberly-Clark's rate is closer to 18% of sales.
PG Operating Margin (TTM) data by YCharts.
3. A bigger cash commitment
P&G comes out ahead in a direct match-up comparing the strength of these two dividends. Its payout amounts to less than 50% of trailing earnings, compared to over 60% for Kimberly-Clark. Thus, the company has more room to announce hefty raises in the future, especially now that foreign currency swings are becoming less of a drag on reported earnings.
Additionally, at 61 straight years, the consumer goods titan's streak of consecutive annual pay raises not only trounces Kimberly-Clark's 44 years, it also makes P&G's dividend one of the longest running dividends on the market.
Kimberly-Clark does have the edge on the pace of recent raises. Its management team hiked the dividend by 5% in each of the last two years, compared to P&G's 3% boost this year and its 1% uptick in 2016.
Zoom out and look at the broader cash return picture, though, and you'll see that P&G is committed to returning buckets of excess cash to shareholders. It delivered $22 billion to its owners in just the most recent fiscal year. And while most of that total was directed at share repurchases rather than dividend hikes, now that its sales growth pace and profits are strengthening, the company can fund increased dividends without risking pushing its payout ratio up to uncomfortable levels.
