Investors have placed Procter & Gamble (PG -0.03%) and Kimberly-Clark (KMB -0.98%) stocks in the same category here in late 2022. Shares of both consumer staples giants are outperforming the market but are still down significantly on fears about how a spending pullback might impact short-term profits.
Yet, while the two companies compete in many of the same niches, their businesses actually look quite different today. The stock valuations aren't the same, either. With that in mind, let's look at which stock seems like a better buy heading into a potentially rocky 2023 fiscal year ahead.
Growing sales
Both companies are increasing sales in a tough environment right now, but Procter & Gamble has the better momentum. Organic sales in the quarter that ended in late September were up 7%, matching P&G's strong growth rate in the previous 12 months. Meanwhile, Kimberly-Clark grew at a 5% rate.
The sales trend gap looks even larger when you look past that headline growth figure. P&G reported just a 3% volume decline in the latest quarter, which was offset by 9% higher prices and a 1% boost that came from rising demand for some premium products. Kimberly-Clark, on the other hand, noted a 5% sales volume decline.
P&G's relative success at protecting sales volumes even as prices rose suggests it has a bit more pricing power, which should prove valuable if a recession develops. Still, both companies have demonstrated that consumers tend to stick with their brands even while they are cutting spending elsewhere.
Boosting profits
Procter & Gamble's dominant industry position also shows up in its stellar profitability. The company saw huge pressures from soaring transportation costs and higher expenses in areas like labor and raw materials. Yet its operating profit margin still held steady (after accounting for currency exchange swings) at 25% of sales.
Kimberly-Clark's profitability has taken a bigger hit as the company struggled a bit more with cutting costs and striking the right balance between sales growth and price increases. Its operating margin fell by nearly 2 percentage points and is sitting at about 13% of sales.
KMB Operating Margin (TTM) data by YCharts
The good news is that Kimberly-Clark's margin improved compared to the prior quarter. Management believes that this progress is just the start of an expansion that will carry through into 2023, mainly fueled by rising prices. "We have realized significant benefits from pricing actions to offset input cost headwinds," management told investors in late October.
Valuation comparison
As you might expect, P&G stock is valued at a significant premium that reflects its stronger profit and growth profile. Investors are paying 4.2 times annual sales for the stock, or about twice the valuation of its rival. Kimberly-Clark also delivers a much higher dividend yield of 3.7% today compared to P&G's 2.7%.
Investors looking for a deal might prefer Kimberly-Clark's stock, given its higher yield and lower valuation. However, that preference only makes sense if you believe the company will close the performance gap with P&G. The business has been trying to accelerate growth and margin expansion for several years, though, without much success.
Until that broader trend changes, P&G stock looks like the better buy. Yes, shrinking sales volumes imply a tougher period ahead for growth. But the company has all the resources it needs to weather a downturn, while still providing a growing dividend payout to its shareholders in 2023 and beyond.
