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Better Buy: The Procter & Gamble Company vs. Kimberly-Clark

Consumer staples stocks give investors the comfort of reliable customer demand for the products companies make, and Procter & Gamble (NYSE: PG) and Kimberly-Clark (NYSE: KMB) together command dozens of billion-dollar brands known the world over. The two giants in the industry have done a good job of carving up the market and capitalizing on opportunities in many different niches of the business, and savvy investors want to know which of these two successful companies has the more attractive stocks right now. The factors discussed below should tell you what you need to know to make an informed decision that's consistent with your investing strategy and financial goals.

Valuation and stock performance

Over the past year, the performance of these two stocks has been tepid at best. Procter & Gamble has at least eked out a modest gain of 4% since July 2016, although that dramatically underperformed the stock market overall. Kimberly-Clark stock has fared much worse, falling 7% in price over the same period.

Turning to valuation, the two stocks weigh in with mixed results. If you look solely at earnings over the past 12 months, then P&G looks to be less expensive on a simple valuation basis, trading at 16 times trailing earnings compared to 20 times earnings for Kimberly-Clark. However, if you incorporate near-term future estimates for earnings, then the two stocks switch positions. Kimberly-Clark trades at just 18 times forward earnings, while Procter & Gamble climbs to a forward multiple of nearly 22. That latter comparison appears to be more consistent with the gain in stock price that P&G has seen relative to Kimberly-Clark recently.

Image source: Kimberly-Clark.

Dividends

Both Procter & Gamble and Kimberly-Clark have extremely impressive track records on the dividend front. The two stocks are nearly indistinguishable based on current dividend yield, with both weighing in close to the 3.1% yield level right now.

Procter & Gamble and Kimberly-Clark are both Dividend Aristocrats, with long histories of rising dividends. Kimberly-Clark has boosted its dividend each year for 45 straight years, including the 5% increase in March that took its quarterly payout to $0.97 per share. Procter & Gamble is one of the few stocks in the market to top that streak, with 61 straight years of increases culminating in a 3% rise this past April. P&G's payout ratio of 75% of earnings is higher than Kimberly-Clark's 60% figure, and that gives Procter & Gamble slightly less latitude to accelerate dividend growth in the future. That gives a slight edge to Kimberly-Clark, but it's a relatively small one.

Growth prospects and risks

Conditions in the retail world have been far from ideal lately, and that has presented challenges even to major consumer staples producers with a global scope. Procter & Gamble has had to deal with sluggish results lately, including a 1% drop in revenue in its first-quarter 2017 results, extending a troubling trend in top-line performance for the company. Competition from e-commerce concepts like Dollar Shave Club hit P&G's Gillette grooming segment hard, and rising commodity costs weighed on gross profit margin. Procter & Gamble has had to be highly disciplined in finding cost-cutting measures internally in order to keep its profits strong, and even that wasn't enough to prevent a 9% hit to net income. With the company predicting losses of market share in key product lines in the future, Procter & Gamble is hoping for better times ahead.

Kimberly-Clark has had to handle very similar issues. Earlier in the year, the company saw surprisingly weak performance in its usually strong core U.S. market, with organic sales falling by 1% from the prior year. Kimberly-Clark managed to boost net income slightly, but investors were generally uncomfortable with the conditions the company was seeing. Just earlier this week, Kimberly-Clark reported second-quarter results that showed new challenges, including a 1% drop in total revenue and a year-over-year decline in net income. The company added that in light of tough conditions in areas like consumer tissue and personal care items, Kimberly-Clark would need to reduce its sales outlook and guided investors toward the bottom end of its previous guidance for earnings per share.

With strong dividends, poor share performance, similar valuations, and challenges to future performance, Procter & Gamble and Kimberly-Clark have a lot in common. Kimberly-Clark's smaller size gives it a bit more flexibility to adapt to changing times, but Procter & Gamble's larger size offers security to those who fear what could be coming around the corner for the consumer staples industry.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.