Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: Procter & Gamble Co vs. Kimberly Clark Corp

By Brian Stoffel - May 22, 2016 at 7:47AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

When two conglomerates battle, the balance sheet and the dividend act as the tipping point.

Amongst the retired, it's a topic of discussion as old and heated as politics and religion: What are the very best dividend stocks to invest in?

Ok, maybe it's not that hot of a topic. But for those who wish to preserve and grow their nest eggs -- safely -- dividend-paying stocks play a crucial role. Two stalwarts worth considering are home-goods giant Procter & Gamble (PG 1.61%) and all-things-paper specialist Kimberly-Clark (KMB 1.19%).

Below, I'll walk you through three different lenses to evaluate these two companies and help determine which is a better buy at today's prices.

Financial fortitude

Hard times can really tell you a lot about a company. If it has lots of cash on hand, a recession can actually be a good thing: A company can buy back stock, out-spend its cash-strapped rivals, and even acquire them...if the price is right.

Debt, on the other hand, does just the opposite: It forces companies to narrow the scope of what they offer, cut back on reinvestment in their business, and even be forced into bankruptcy.

That's why the financial fortitude of the underlying company you own is so important. Here's how P&G and Kimberly-Clark stack up on a few key metrics.

Company

Cash

Debt

Net Income

FCF

Procter & Gamble

$13.8 billion

$32.8 billion

$9.1 billion

$12 billion

Kimberly-Clark

$635 million

$8.0 billion

$1.1 billion

$1.85 billion

FCF = free cash flow. Net income and FCF are on trailing-12-month basis. Data source: Yahoo! Finance.

When comparing these figures, it's worth noting that P&G is valued at roughly five times the size of Kimberly-Clark. But even that doesn't help explain the divergence in figures between these two.

While both of these companies sport pretty high debt levels, P&G's looks much more reasonable than Kimberly-Clark's, relative to the amount of cash on hand, and the levels of free cash flow coming through.

While neither company could go on a spending spree if a recession hit, P&G is clearly in a better position to endure a recession than Kimberly-Clark.

Winner = Procter & Gamble

Valuation

This can be a tricky metric to encapsulate. There are lots of ways to measure the "value" of a stock. Below, I've included four metrics I always check before making a buy or sell decision.

Company

Price to Earnings

Price to Free Cash Flow

Price to Sales

Price to Earnings Growth (PEG) Ratio

Procter & Gamble

21

18

3.0

3.6

Kimberly-Clark

22

25

2.5

2.8

Non-GAAP measures used for P/E. Data sources: Yahoo! Finance, E*Trade.

Usually, I favor the price to free cash flow ratio over price to earnings because there are fewer accounting gimmicks that can change free cash flow. On that basis, P&G looks like it's clearly the cheaper company -- trading at an almost 30% discount to Kimberly-Clark.

But P&G's PEG ratio -- which takes a company's growth rate into account -- is actually higher. In other words, analysts generally believe Kimberly-Clark will grow faster moving forward than P&G -- thus they are willing to pay a higher premium for it.

Usually, I'd settle this by calling it a tie, but with these stocks, there's an extra factor to consider: dividends.

Company

Current Yield

Payout From FCF

Procter & Gamble

3.3%

62%

Kimberly-Clark

2.9%

69%

Data source: Yahoo! Finance.

If you're already a shareholder of either company, there's good news: Both offer substantial yields, and both have fairly safe dividends. FCF is what dividends are paid out of, and neither company needed to use more than 70% of FCF to pay back shareholders. That means the dividends are likely safe from a cut and -- given continually improving business -- have room for future growth.

But since P&G offers both a higher yield, and uses less of its FCF to pay out that yield, I'm giving the nod to P&G here.

Winner = Procter & Gamble

Sustainable competitive advantage

In my years as an investor, nothing has played a bigger role in the success/failure of an investment than the sustainable competitive advantage of the underlying businesses. Both of these companies take the same approach to their advantages: They have the most powerful brand names in their respective categories.

P&G owns many of the products you use in your household. Many generate over $1 bilion in sales per year, including Gilette, Bounty, Duracell, Head & Shoulders, Pampers, and Pringles.

Kimberly-Clark has a more focused product line, some of which compete against P&G. The most popular include: Scott paper towels, Kleenex, Huggies, Cottonelle, and Kotex.

It's pretty hard to delineate an obvious winner between these two since their advantages are almost identical: being able to charge a slight premium for the most widely recognized and trusted names in their respective fields.

Winner = Tie

At the end of the day, P&G simply has a healthier balance sheet and a more attractive dividend than Kimberly-Clark. That's not to say Kimberly-Clark stock is doomed to underperform over the coming years, just that -- based on the information available right now -- P&G seems like the more obvious choice.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
PG
$146.11 (1.61%) $2.32
Kimberly-Clark Corporation Stock Quote
Kimberly-Clark Corporation
KMB
$136.76 (1.19%) $1.61

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.