Investors avoided both Home Depot (HD 0.57%) and Procter & Gamble (PG 0.19%) stocks this past year as Wall Street turned its attention back toward high-growth tech businesses. That shift represents a great opportunity for income investors. The underperformance means these stocks are available at a relative discount, and their dividend yields are higher than you might find elsewhere in the Dow Jones Industrial Average.
But which one would be the better fit for your portfolio right now? Let's dive right in.
Sales challenges
Procter & Gamble is doing better in the growth department today. Organic sales were up 7% last quarter and are on track to rise by about 5% in this fiscal year. Contrast that with Home Depot, which is expecting a roughly 4% decline for fiscal 2023.
NYSE: HD
Key Data Points
Looking behind those headline growth metrics reveals the scope of demand challenges that these businesses face. Home Depot is seeing weaker demand from do-it-yourself shoppers, who have been squeezed by inflation and rising interest rates. That slump shows up clearly in its customer traffic trends, which are declining for a second straight year in 2023.
P&G is doing better in its comparable sales volume figure, which was down just 1% last quarter. The owner of consumer staples brands such as Tide is also benefiting from quickly rising prices, giving it another source of increasing organic sales .
Financial wins
Both companies seem likely to extend their excellent dividend growth streaks. Home Depot's profit margin is holding above 14% of sales, compared with Lowe's and its 13% level. P&G is beating Kimberly-Clark here, too, with its 23% profitability.
Home Depot's cash flow trends are a bit stronger, implying additional solid raises ahead over the long term. Yet income investors can expect a bigger dividend raise from P&G in 2024 because it's on track to boost earnings while Home Depot is projecting a 10% earnings drop in fiscal 2023.
Shareholders shouldn't read too much into that projected decline, as it's being powered by temporary issues such as price deflation on lumber. Home Depot is also seeing improvements in its customer traffic rates, helping explain why Wall Street is getting more optimistic about the stock. There could be a modest industry rebound ahead once interest rates begin falling again.
Price and yield
P&G shares are a bit more expensive on both a price-to-earnings and price-to-sales basis. You'll pay 5 times annual revenue for this stock today, for example, which is far higher than Home Depot's 2.3 times sales and well above Kimberly-Clark's rate of 2 times sales. Yet P&G and Home Depot both yield about the same 2.5% based on today's prices.
Ultimately, Home Depot stock offers more potential for investors willing to endure volatility while the housing market stabilizes. Yes, a P&G investment isn't as risky given the company's high profitability and its focus on the recession-resistant consumer essentials niche.
For a cheaper valuation, though, you can consider owning Home Depot. The home-improvement giant has emerged from every prior industry downturn to go on and set new sales records, after all. Exposing yourself to a bit more risk in this case should translate into better long-term returns over the next multiyear period.
