The Procter & Gamble Company (NYSE:PG) and The Clorox Co. (NYSE:CLX) are two of the most well-known and highly regarded stocks in the consumer staples sector. They are about as steady as one can get when it comes to investing in individual stocks. They both sell household consumer products, which is the real beauty of their businesses. Even when the broader economy takes a nosedive, people still need paper towels, toothpaste, and cleaning products.
This means companies like P&G and Clorox put up steady results with low volatility of revenue and profits. The other side of this, of course, is that when the economy picks up steam, consumer staples stocks often lag behind.
Nevertheless, these are two premier dividend-paying stocks. Let's dig a little deeper to determine which might have more to offer income investors right now.
Strong brands fuel both companies' success
P&G and Clorox have long track records of success, and they owe it all to their powerful brands. P&G is a true behemoth, a company with a $227 billion market capitalization. P&G offers its products in more than 180 countries worldwide, and holds 23 brands that each generate at least $1 billion in annual sales.
Clorox is a much smaller company than P&G. It has an $11 billion market capitalization, but it still controls impressive positions with several of its key brands. According to the company, nearly 90% of its portfolio has a No. 1 or No. 2 position in its respective category..
Both companies recently wrapped up their fiscal years, but the results weren't all that impressive. P&G's organic sales, which strip out the effects of currency fluctuations, increased 3% in fiscal 2014. For its part, Clorox's organic sales grew 2%, and diluted earnings declined by 1%. The key culprits were rising costs for raw materials and manufacturing, and flat volumes.
Because of their strong brands, P&G and Clorox have rewarded their shareholders for a very long time. P&G has increased its dividend for 58 consecutive years. Clorox has raised its dividend every year since 1977. However, here's why investors should expect the growth rate of their dividends to be modest going forward.
Dividend growth potential is limited
P&G and Clorox investors should expect mid- to high-single-digit percentage growth rates in their respective dividends for the foreseeable future. This will be slightly lower than historical dividend increases, primarily because of limited future earnings growth. P&G increased its dividend 7% this year. Clorox also increased its dividend this year, but by just 4%.
These were below both companies' average raises in recent years. P&G and Clorox have both increased their dividends by 8% compounded annually over the past five years.
P&G and Clorox won't be able to raise their dividends faster than their earnings growth. Unfortunately, neither company expects strong growth in the upcoming year, which will put a lid on possible dividend growth. For example, P&G expects only low-single-digit organic sales growth in the upcoming fiscal year. Earnings growth is expected to be similar to last year's performance, around mid-single digits on a percentage basis. Meanwhile, Clorox management expects 2% organic sales growth and $4.42 in diluted EPS at the midpoint of its forecast. This would represent just 3.8% EPS growth year over year.
With such low growth, it will be difficult for P&G and Clorox to pass along high dividend increases. This means investors should temper their expectations for future dividend growth.
The Foolish bottom line
P&G and Clorox are both large-cap consumer staples giants. Both companies turned in modest growth last year, but P&G has an advantage because of its higher growth. Clorox suffered from poor volumes and rising costs more than P&G, and its challenges are likely to continue in the coming year. Not surprisingly, P&G handed in a stronger dividend increase last year.
P&G and Clorox provide similar yields around 3.3%, but P&G has better dividend growth prospects thanks to its stronger performance. For these reasons, income investors would be better off picking P&G over Clorox.
Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. 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.