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

By Markets Fool.com

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?

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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 and all-things-paper specialist Kimberly-Clark .

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.

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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.

The article Better Buy: Procter & Gamble Co vs. Kimberly Clark Corp originally appeared on Fool.com.

Brian Stoffel has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark and Procter & Gamble. 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.