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

By Demitrios Kalogeropoulos Markets Fool.com

Image source: Getty Images.

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Consumer goods specialists can make solid long-term income investments. With a portfolio of products that millions of people use daily -- like paper towels, toothpaste, and detergent -- the companies tend to keep earnings chugging higher no matter what's going on in the broader global economy.

That's a big reason why Procter & Gamble (NYSE: PG) and Kimberly-Clark (NYSE: KMB) boast streaks of dividend raises that stretch back not just years, but decades. P&G hasn't missed an annual boost in 60 years, and Kimberly-Clark's annual streak stands at 45.

Both companies recently updated investors on their operating trends and outlook for the coming year, so here's how they stack up as dividend stock candidates.

Metric

P&G

Kimberly-Clark

Market cap

$232 billion

$43 billion

Sales growth

2%

2%

Profit margin

16%

11%

Dividend yield

3.1%

3.2%

Payout ratio

77%

66%

Latest dividend raise

1%

5%

Data sources: Company financial filings and S&P Global Market Intelligence.Sales growth excludes acquisitions and divestments and is on a constant currency basis for the past complete fiscal year.

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Operating trends

P&G and Kimberly-Clark both grew organic sales at the same 2% rate in their most recent complete fiscal year. But the companies have starkly different momentum right now. P&G's 2016 sales growth pace doubled over the prior year and it has outpaced management's expectations over each of the last two quarters. Meanwhile, its gains have come mostly from higher sales volume, which implies healthy growth ahead.

Kimberly-Clark, in contrast, grew at just 2% over the last 12 months to mark a disappointing slowdown from the prior year's 5% spike. Its executives have had to dial back their expectations in each of the last two quarters, and volume growth slowed to a halt in its most recent period.

Neither company is enjoying robust gains, though, as the industry slinks along at near-zero growth and as political and economic hotspots continue to pinch results. Venezuela took a bite out of earnings for P&G and Kimberly-Clark last year, and this year they're wrestling with new disruptions in places like Brazil and India.

As a result, both companies have had to rely heavily on cost cuts to keep earnings growth on pace. P&G has removed nearly $2 billion out of its annual expenses to beat executives' efficiency goals. Ditto for Kimberly-Clark, which last year sliced $435 million from its costs. With help from these savings, both companies expect to boost profit at the same 5% pace in the 2017 fiscal year.

Dividend and valuation

On strictly income criteria, Kimberly-Clark looks like the better buy. Its yield is a bit higher even as a healthier payout ratio points to bigger dividend hikes over the coming years. P&G, after all, just gave income investors their weakest annual raise in modern memory (1%) following a year that saw its payout ratio soar to over 100% of earnings.

Kimberly-Clark's payout commitment has grown uncomfortably high in recent years too, but not so large that management couldn't keep delivering solid raises. In fact, in late January Kimberly-Clark announced a 5% dividend hike that matched its increase in the prior fiscal year. P&G tends to use stock repurchases as the main channel by which it returns cash to shareholders.

Procter & Gamble's stock is valued at 22 times expected earnings, making it seem expensive compared to Kimberly-Clark's price-to-earnings ratio of 19. Yet that's a fair premium, in my opinion, given that the consumer goods titan is on a faster growth track and enjoys stronger profitability.

Income investors buying Kimberly-Clark today will get a slightly better yield and perhaps a bigger payout raise next year. Yet P&G is likely to see better results over the long haul as it returns to market share growth following a brutal two-year transformation period.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Kimberly-Clark. The Motley Fool has a disclosure policy.