Consumer products giant Procter & Gamble (NYSE:PG) is widely regarded as a legendary dividend stock. There's good reason for this, as P&G is a member of the exclusive Dividend Aristocrats, a list that includes only companies that have increased their dividends for at least 25 years in a row. In fact, P&G is a Dividend Aristocrat more than twice over -- it's raised its shareholder payout for an amazing 58 consecutive years.
But whether P&G's future will be as impressive as its historical track record is a different question. P&G's growth is slowing down, and it's having trouble effectively penetrating the emerging markets. The stock seems overvalued given its relatively weak growth. For these reasons, I believe dividend growth investors would be better off buying one of P&G's smaller rivals, Church & Dwight Co. (NYSE:CHD).
P&G's growth leveling off
The primary concern I have with P&G is its slowing growth. For large international companies like P&G, the strengthening U.S. dollar is a stiff headwind, as the rising dollar makes international revenue less valuable when it's converted back into the domestic currency. Unfavorable currency translation was a major reason why P&G's revenue and earnings per share from continuing operations fell 4% and 5%, respectively, during the first three quarters of the year.
However, even when excluding currency, P&G isn't growing much. The company's currency-neutral revenue grew just 1% last quarter, year over year.
P&G suffered poor results in two key segments -- its Beauty, Hair, and Personal Grooming unit, as well as its Fabric and Home Care business -- which collectively represent 52% of P&G's total revenue. The beauty segment posted a 3% decline in organic sales, while the fabric business was flat. Organic declines can't be written off by currency; these represent bigger issues with underlying demand for P&G's products.
Church & Dwight in high-growth mode
By comparison, Church & Dwight is experiencing much more success this year. Church & Dwight might not be a household name with the likes of P&G, but it's got plenty of strong brands that are likely found in millions of households across the world. Church & Dwight's core brands include Arm & Hammer, Nair, Oxi Clean, Vitafusion, and Trojan.
These high-quality brands have led to very strong growth for the company. Church & Dwight grew organic sales, which strips out currency effects, by 5% in the fourth quarter and 3% in the first quarter of 2015. And, Church & Dwight grew organic EPS by 8% last year, and 13% in the first quarter. These strong results led the company to raise its full-year guidance, as management now expects 7%-9% core EPS growth in 2015. Compare this to P&G, which expects core EPS to be flat to down mid-single digits.
It's also worth noting that Church & Dwight is no dividend slouch. The company recently declared its 457th regular quarterly dividend, and has increased its dividend for 19 years in a row. Its last dividend increase was 8%, which was far greater than P&G's 3% dividend increase earlier this year. This reflects the difference in each company's respective sales and earnings growth rates.
Church & Dwight: Better for dividend growth investors
P&G offers a higher dividend yield than Church & Dwight -- 3.3% compared to 1.6%. Therefore, it's entirely reasonable for investors who need current income, such as retirees, to stick with P&G. But for those investors with a longer time horizon, such as dividend growth investors, Church & Dwight is likely to be a better longer-term bet. Its lower dividend yield will catch up to P&G's yield over time as a result of its much higher dividend growth.
From a total return perspective, Church & Dwight looks like a better stock. Its valuation is comparable to P&G's; but with much higher earnings growth, it's likely to generate higher stock price appreciation than its larger, stodgy competitor.
Bob Ciura owns shares of Apple. The Motley Fool recommends Apple and Procter & Gamble. The Motley Fool owns shares of Apple. 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.