If you had $100, you could buy roughly one share of PepsiCo (NYSE:PEP) or one share of Clorox (NYSE:CLX). Both companies operate in the consumer goods industry, but buying stock in one isn't the same as buying stock in the other. PepsiCo has much better prospects for growth, because of its strong snacks business, as well as its potential in emerging markets. By comparison, while Clorox is a highly profitable company, it's not putting up much growth. And Clorox is getting hit by rising costs, which are squeezing its margins.
This is reflected in each company's outlook on future growth and cash returns to shareholders. Looking at the stocks from these angles, PepsiCo looks to be the better investment.
PepsiCo is on stronger ground
PepsiCo has put up very impressive results so far this year. PepsiCo produced $5.1 billion of free cash flow over the first three quarters of the year, thanks largely to the strong growth of its Frito-Lay snacks business. Organic revenue grew 9% for Frito-Lay in Latin America. Furthermore, PepsiCo generated 11% revenue growth in Asia, the Middle East, and Africa, driven by 11% volume growth of snacks. Pepsi's earnings per share rose 11% last quarter, year over year, excluding the effects of currency fluctuations, and management expects 9% earnings growth this year.
Clorox's performance has not been as impressive in recent quarters. It recently concluded its fiscal 2015 first quarter. Earnings grew 5%, thanks mostly to cost-cutting efforts. In the previous fiscal year, organic sales grew 2%, and diluted earnings declined by 1%. Clorox was hurt by higher manufacturing and logistics costs, as well as higher costs for raw materials.
PepsiCo returns more cash to shareholders than Clorox thanks to its stronger performance. In the first nine months of 2014, PepsiCo paid $2.7 billion worth of dividends and bought back $3.2 billion of its own shares. This year, PepsiCo expects to return $8.7 billion to shareholders in the form of both dividends and share repurchases, which would represent a 35% increase from 2013.
To be sure, Clorox returns a good deal of cash to shareholders as well. Clorox has raised its dividend every year since 1977. But its dividend growth is slowing, as a natural consequence of its slowing earnings growth. Clorox's dividend increase this year was just 4%, far below last year's 11% raise. Making matters more uncertain is that management does not expect earnings to improve significantly this fiscal year. Clorox expects just 1%-3% organic sales growth, and $4.35 per share to $4.50 per share in diluted earnings, in fiscal 2015. That would represent just 2%-5% earnings growth from the previous year, which will probably set the table for another disappointing dividend increase next year.
Pick PepsiCo over Clorox with your $100
Both PepsiCo and Clorox trade near $100 per share and both stocks offer dividend yields near 3% (Clorox's yield is actually higher at current prices). But that's about where the comparisons end. PepsiCo is enjoying solid growth thanks to its snacks business. On the other hand, Clorox is seeing growth slow down, and is suffering contracting margins due to rising costs. Investors should also be concerned with dividend growth, and in that regard, PepsiCo seems to have a brighter future. PepsiCo distributes just 58% of its trailing-12-month earnings per share in dividends to shareholders, while Clorox's payout ratio is a more concerning 76%.
This leaves PepsiCo with a lot more financial flexibility to return more cash to shareholders through stock buybacks and dividend raises. The bottom line is that Clorox is standing still, while PepsiCo's momentum is going strong.
Bob Ciura owns shares of PepsiCo. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of PepsiCo. 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.