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The 2 Best Stocks to Invest in Baby Products

By Bob Ciura – Jun 25, 2015 at 11:53AM

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Procter & Gamble and Kimberly-Clark do well with diaper sales.

The baby-products industry is a huge business. According to retail industry research firm IBISWorld, spending on baby products in the U.S. alone was a $23 billion business in 2013. With approximately 4 million babies born in the U.S. each year, plus the prospect of international growth opportunities, it's likely that baby products spending is only poised to grow going forward.

Most parents will do (and spend) whatever is necessary to keep their bundles of joy happy and healthy. This results in a remarkably steady level of spending. Even in a recession, new parents are reluctant to sacrifice the well-being of their babies. You can be sure there are companies lined up to profit from this.

For those investors interested in the baby-products industry, two companies reign supreme: Procter & Gamble (PG 0.21%) and Kimberly-Clark Corporation (KMB 0.40%).

Industry leaders
P&G and Kimberly-Clark dominate the baby-products industry, first and foremost through their diaper products. P&G sells the Pampers and Luvs diaper brands, while Kimberly-Clark offers Huggies and Pull-Ups diapers. These brands have given the two companies an ironclad grip on the baby-products industry.

P&G has a large baby-care business, which contributed to its earnings performance last quarter. Organic sales rose 2% in P&G's combined baby, feminine and family care segment, which stuck out because it outperformed several other business lines. For example, organic sales declined 3% in P&G's core beauty, hair, and personal care segment. Organic sales were flat in fabric and home care.

Within the baby-care division, P&G noted both strong pricing, as well as positive product mix. Specifically, management noted strong growth of Pampers Swaddlers in North America. This is significant because diapers are a major part of P&G's total results.

Pampers is P&G's single-largest brand with $10 billion in annual sales. And Pampers is a growth driver. Sales of Pampers rose at a 5% annual clip during the past three years.

Going forward, P&G is counting on its premium-diapers line to drive growth into the future. For example, its premium-priced line is on track to reach more than $750 million in sales this fiscal year, which would represent more than 30% growth year over year.

Likewise, diapers were a big reason Kimberly-Clark beat earnings expectations last quarter. The company reported quarterly results on April 21, and the stock popped 5% thanks to better-than-expected performance. The biggest growth driver was in Kimberly-Clark's Personal Care segment, specifically diapers, which management singled out on the conference call with analysts.

Overall, organic sales of diapers, which excludes the effects of currency fluctuations, rose in the high teens on a percentage basis. This was due largely to huge growth overseas. Organic sales of diapers soared 55% in Eastern Europe, 35% in China, and 15% in Brazil last quarter.

Shareholder rewards aplenty
Both P&G and Kimberly-Clark are highly profitable, thanks largely to their baby-product offerings, and as a result, can afford to generously reward their shareholders. Each company is a blue-chip dividend stock, with long track records of paying dividends.

For example, P&G has been paying a dividend for 125 consecutive years since its incorporation in 1890. And it's raised its dividend for an impressive 59 years in a row. Meanwhile, Kimberly-Clark has 81 straight years of payouts under its belt. It has increased its dividend for 43 consecutive years.

P&G and Kimberly-Clark are the two companies sitting firmly atop the baby-products industry. They reap billions in sales of diapers and other baby products each year. These are the two best stocks in which to invest in baby products.

Bob Ciura owns shares of Apple. The Motley Fool recommends Apple, Kimberly-Clark, and Procter & Gamble. The Motley Fool owns shares of Apple. 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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