Consumer staples companies make ideal candidates for dividend investors seeking steady income. Especially if they are leaders in their industries, these types of businesses can boost sales through a wide range of selling environments. And they often have the scale necessary to generate unusually strong cash and profits, leading to excellent shareholder returns over the long term.
Ideally, income investors can find a stock that can deliver both capital appreciation gains and a quickly rising dividend. Clorox (CLX -0.69%) and Coca-Cola (KO) both meet several of these criteria by selling products that are used by millions of people each day, but which one is the better buy today?
Let's take a closer look.
The growth matchup
Coca-Cola wins the growth comparison handily. Organic sales were up a blazing 12% year over year in the most recent quarter compared to Clorox's 8% uptick. The beverage titan also managed a much better balance between rising prices and higher sales volumes. In Clorox's case, the company has had to rely solely on higher prices to offset declining volumes.
Coke is achieving higher market share in the growing beverage industry, partly thanks to its already dominant position, partly due to marketing strength, and partly because of a string of popular product releases and new launches. Management is excited about the Smartwater brand, for example, which grew sales volumes by 8% year over year this past quarter. "We are encouraged by our first quarter 2023 results," CEO James Quincey said in a late April press release. For growth-focused investors, Coke will be more attractive on this basis.
Cash and profits
Clorox has leading positions in its disinfectants and cleaning products niche, but no company can challenge Coke when it comes to market share power. It accounts for more than 3% of all beverage servings sold across the planet each day, after all.
KO Operating Margin (TTM) data by YCharts
That competitive strength translates directly into higher margins. Coke routinely turns nearly 30% of sales into operating profit margin compared to Clorox's 10% rate. PepsiCo, for more context, generates an operating profit of about 13% of sales.
The good news for Clorox shareholders is that trends are improving here thanks to cost cuts and price increases. The company is also generating more cash than it was a year ago. Yet Coke still seems like the stronger stock when it comes to key financial metrics like earnings power, profitability, and cash flow.
The better value
It's true that you can buy Clorox stock for a much lower relative price. Shares are valued at less than 3 times revenue compared to about 6 for Coca-Cola. These valuation levels might shift as the companies report their next earnings updates in August, but when it comes to valuation, Coke is the more expensive stock.
Most investors will be happy to pay that premium, though, given the company's stronger financial position, its better competitive outlook, and its robust dividend. The beverage giant's payout sits at roughly 3% today, which income investors can consider an excellent bonus for owning this stock (Clorox's yield is about the same). Coke has raised its dividend by an annual average of 3.9% over the past three years compared to Clorox's 3.6%.
Coca-Cola's payout ratio of 65% is far more sustainable than Clorox's 83% and leaves more room for future growth. Coca-Cola is also a Dividend King, meaning it has grown its dividend every year for at least 50 straight years (61 years in Coke's case). Clorox also has a decades-long history of dividend growth (46 consecutive years).
Coke is a great dividend stock, but also a great company to hold for sales and earnings growth. The same can't be said about Clorox.
