The two consumer products giants have portfolios made up of some of the biggest and best-known brands in their respective spaces. Kimberly-Clark makes Huggies diapers, Kleenex tissues, and Scotts toilet tissue, while Procter & Gamble sells Crest toothpaste, Gillette razors, and Pampers diapers.
While their businesses have a lot of similarities, let's see if one stands out from the other as an investment prospect.
Does size matter?
Without question, at $330 billion, Procter & Gamble's market valuation exceeds by nearly seven-fold that of Kimberly-Clark, though the former's sales are only about three-and-a-half times greater than those of the latter. That means P&G is being awarded a premium for the quality of its sales compared to what Kimberly-Clark is bringing in. That raises a question: is P&G's business worth that premium?
Over the past year, the total return of P&G's stock, which includes the value of dividends paid to investors, has far outstripped Kimberly-Clark 54% to 30%. But as we move out over time, the gap narrows. In the last five years, P&G generated total returns of 73% versus 62% for its rival, and over the past decade, Kimberly-Clark actually surges well into the lead, generating total returns of 269% to 196% for P&G.
Who's growing faster?
Because of its size, Procter & Gamble has been able to develop a more diversified product line, and over the past year so, although it faced foreign currency exchange rate headwinds and higher transportation costs, it was able to see organic sales rise 5% from the year-ago period.
Kimberly Clark, on the other hand, facing the same headwinds as its rival, saw sales decline 1% over the first six months (it operates on a different fiscal calendar than P&G). Yet again, when we look out over longer time horizons, Kimberly Clark has held up better, even though sales have contracted for both companies during that time due in large part to restructuring efforts.
But is it profitable growth?
Size has likely benefited P&G when it comes to gross margins, as they've been consistently in the high 40%s over the last five years, suggesting it can get better pricing while maintaining tighter price controls. Kimberly-Clark is no slouch, but its gross margins are in the low to mid-30%s. It's a similar case when comparing their operating profits as well, with P&G exceeding the margins of Kimberly-Clark. Only recently has Kimberly-Clark pulled ahead on net margin, as it's been able to use its position to benefit on interest and taxes.
Who has the safer dividend?
Both Procter & Gamble and Kimberly-Clark have been proven winners when it comes to their dividends, each increasing their shareholder payouts for decades: P&G for over 60 consecutive years; Kimberly-Clark for nearly 50 years.
They both continue to pay handsome dividends to investors, with P&G's payout currently yielding 2.4% and its rival's yielding 2.9%. They both have payout ratios in the low- to mid-60% range (calculated by dividing the company's dividends per share by its earnings per share).
While there are a lot of factors that can be considered in determining safety, most investors would prefer the payout ratio to be lower rather than higher. Around 30% to 40% is considered an average safe level as companies can continue to pay dividends even if earnings drop, or they could increase the payout further with little risk.
P&G and Kimberly-Clark may be approaching a level of being constrained if their fortunes took a turn for the worse.
On the surface, Procter & Gamble looks like the right buy at the moment. But when you consider the premium P&G is charging investors for its stock, Kimberly-Clark's long-term outperformance and discounted stock relative to its rival suggest it is the better investment.