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

By Markets Fool.com

Image source: Getty Images.

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There are some companies that -- unbeknownst to the average person -- are able to become integral parts of our daily lives. That low-level awareness, and the repeat buying behavior it engenders, can drive strong returns for investors over time.

While the parent company might not be well-known, how many of us can say that we have Head & Shoulders, Crest Toothpaste, Pampers diapers, or Gillette razors somewhere in our house? If so, you're a regular customer of Procter & Gamble (NYSE: PG).

Or how about Huggies diapers, Kotex, Scott toilet paper, or something as ubiquitous as Kleenex? If you have any of those, chances are you've been a regular contributor to Kimberly-Clark's (NYSE: KMB) coffers.

But between these two companies -- which have both produced market-beating results over the past 15 years -- which is the better buy today? There's no definitive way to answer the question, but I think we can get closer to a guess by looking at it through three different lenses.

Financial fortitude

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Cash in the bank seems boring. Most shareholders would like a company to either reinvest in itself or give the cash back to them via buybacks or dividends. But as boring as it may seem, cash in the bank is vital.

That's because all companies, whether because of macro or company-specific issues, will experience tough times. When those times hit, companies with lots of cash and little debt have options: they can outspend rivals, keep things running as normal, buyback shares on the cheap, or even make acquisitions.

Companies that have lots of debt are in the opposite boat, forced to do everything possible to make ends meet and avoid bankruptcy.

Here's how these two stack up in terms of financial fortitude. While looking at this, remember that Procter & Gamble is valued at over five times the size of Kimberly-Clark

Company

Cash

Debt

Net Income

Free Cash Flow

Procter & Gamble

$14.1 billion

$31.1 billion

$10.6 billion

$11.5 billion

Kimberly-Clark

$0.9 billion

$7.7 billion

$2.0 billion

$2.7 billion

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

While the figures for net income and free cash flow are virtually the same for these two -- relative to their size -- one has a clear advantage when it comes to cash and debt: Procter & Gamble.

While I'm not a huge fan of the debt levels of either of these companies, P&G's $14 billion cushion leaves me feeling much better about the company's prospects in tough times than Kimberly-Clark's war chest of less than $1 billion.

Winner = Procter & Gamble

Sustainable competitive advantage

Pared down to its most basic essence, a sustainable competitive advantage -- often called a "moat" in investing circles -- is the special "something" that makes a company what it is. A moat is what separates a company from its competitors and convinces customers to keep coming back.

For both of these companies, the moat is provided by the strength of their core brands. Procter & Gamble currently has 19brands with over $1 billion in annual sales, and an additional 19 with $500 million or more. The most important last year were fabric and homecare products -- including Downy, Gain, Tide, Febreze, and Mr. Clean -- which produced 32% of net sales and 27% of net earnings.

Kimberly-Clark, on the other hand, doesn't quite have the same breadth of offerings, as it tends to focus more on paper-based products. The personal care segment -- which includes Huggies, Kotex and Depends -- is the most important, as it provided 53% of sales and 53% of operating income last year.

At the end of the day, I really have to call this a tie. Both companies have products that people will likely keep buying no matter the economic conditions, and each has some of the strongest brands in their respective industries.

Winner = Tie

Valuation

Finally, we have the question of valuation. There's no perfect way to measure this, but here are four data points I like to consider.

Company

P/E

P/FCF

P/S

PEG Ratio

Procter & Gamble

22

19

3.4

2.7

Kimberly-Clark

19

19

2.3

2.5

Data source: Yahoo! Finance, E*Trade. P/E reflects non-GAAP earnings.

To be honest, these stocks are as close to being evenly priced as you can get -- and I'm not particularly fond of either's overall price tag.

At the same time, however, it's worth mentioning that both offer dividend yields of 3.2%, and both use between 60% and 65% of their free cash flow to pay the dividends. That's a healthy and sustainable ratio that means both dividends are safe, and both have room for growth should FCF continue to trend upwards.

At the end of the day, I'd say these two are even when it comes to valuation.

Winner = Tie

Final Call = Procter & Gamble

So there you have it. In a very close head-to-head battle, Procter & Gamble wins based on its stronger balance sheet. I don't personally own either stock, but if you're looking for safer, dividend-paying companies to put in your portfolio, Procter & Gamble would be a good starting point for your own due diligence.

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