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Underlooked, But Overperforming Companies

By Jacob Meredith – Feb 24, 2014 at 5:03PM

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Three consumer staples companies that have outlasted the market and appear to have the will to continue.

As emotional investors it is easy for us to get caught up in the hype that new technology companies are offering with their promises of revolutionary products that will change the world. Sometimes this pans out very nicely for investors; but most of the time it does not. For every one Apple, or Facebook, or Google there are hundreds, if not thousands of failed ventures in more or less the same fields. 

When it comes to investing over the long term there is nothing wrong -- and quite a bit right -- with sticking to plain vanilla companies offering products you need daily. Some examples of such are Kimberly Clark (KMB 0.77%), Energizer Holdings (ENR 0.89%), and Colgate-Palmolive (CL -0.21%).

Kimberly Who?
You may not recognize the name Kimberly Clark, but their brands are easily recognizable, have you heard of Huggies, Pull-Ups, Kotex, Kleenex, Scott, or Cottenelle? Those are just a few of their everyday brands; Kimberly Clark produces a wide variety of medical devices as well. This company is far from our idea of "innovative" but at the end of the day, they are piling up returns for their investors, and that is what is most important.

On January 2, 2004, you could have purchased a piece of this company at $58.65 a share; ten years later on the last day of 2013 your share would have been worth $104.46. Not bad right? But wait, you forgot to add up the checks they sent you every quarter since 2004, those added up to $24.91. You ended up earning 8.2% a year, compounded, without even reinvesting your dividends.

Kimberly Clark has had profit margins averaging 9.5% over the last ten years, and return on equity of 32% on average. Along with these outstanding numbers, management has increased the dividend every year since 1985 and has been buying back over a billion dollars worth of shares each of the last three years.


Though the little bunny that just keeps going is advertising their batteries, that slogan fits the whole company quite well. You may not have known but along with batteries Energizer sells products under the brand names of Schick, Edge, Hawaiian Tropic, Wet Ones, and Playtex, among others.

The same day ten years ago that you bought Kimberly Clark stock, you could have bought a share of Energizer for $36.87. That share was worth $108.24 at the end of 2013, and since Energizer implemented a dividend in 2012, you received $2.60 in dividends. That equates to a return of 11.6% per year, compounded, not bad for some old battery company.

Along with Kimberly Clark, Energizer also averages strong and stable profit margins, around 8.5%. Over the last five years they have also averaged 17% return on equity, and recently implemented a dividend.

The rest of your home needs
If Kimberly Clark and Energizer do not sell what you need, Colgate-Palmolive probably does. Selling under the brand names of Colgate, Palmolive, Softsoap, Speed Stick, Mennen, among many others, they cover many of your basic needs.

And once again, another plain vanilla company has produced excellent returns for investors. If you had bought a share of Colgate-Palmolive ten years ago on January 2, 2004, you would have paid $24.81 (adjusted for a split). Over the next ten years you raked in $8.70 in dividends and at the end of 2013 your share was worth $65.21. Your yearly compounded return turned out to be 11.5%.

Colgate-Palmolive has reported return on equity averaging over 100% due to aggressive share buybacks and dividend payments, which have lowered their equity value. Though the buybacks and dividends are nice for us investors, it gives return on equity a skewed view. Alternatively we can look at their return on assets, another good measure of management efficiency, which has averaged over 18% in the last ten years, with profit margins averaging over 13% in the same time frame.

And for the market
Numbers don't mean much without a comparison, so let's compare these companies returns to the market. If you invested in the general stock market, as measured by the total return on the S&P 500, for the same period of time we have used in these examples, you would have earned a return of 7.4% per year. All three of our plain vanilla companies have outperformed the market. None of these companies are developing world-changing technologies but they are delivering steady, strong results, and have their shareholders' interests in the board rooms. Like we have all heard before, slow and steady wins the race, these companies may just be a perfect example of that.

What the future holds
It's great that these companies outperformed over the last ten years, but what does that mean for the next ten years? Well, nothing, so you need to take a look. All three of these companies could be considered in the personal products industry, which has an current average valuation of 21 times earnings, and the general market is currently valued around 18 times earnings. This makes Colgate-Palmolive appear to be a little expensive at almost 26 times earnings. Kimberly Clark is a little more fairly priced at right around 20 times earnings. Lastly, Energizer looks to be slightly cheaper, as it is priced just under 16 times earnings. 

Price to earnings ratios should not be your only tool for valuation, but it gives us a pretty accurate view of what the market currently thinks of these companies.

Whether you buy now or buy later, these stocks should be on your radar. They will move up and down with market gyrations, and given a strong track record coupled with the fact that their products are more or less necessities, you could eventually find these stocks thrown in the bargain bin. That is exactly where we like to find pieces of our favorite companies.

Jacob Meredith and clients of Appalachian Capital Group, LLC have no positions in any stocks mentioned. The Motley Fool recommends Kimberly Clark. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Kimberly-Clark Stock Quote
$135.03 (0.77%) $1.03
Colgate-Palmolive Stock Quote
$76.77 (-0.21%) $0.16
Energizer Holdings Stock Quote
Energizer Holdings
$33.03 (0.89%) $0.29

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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