Procter & Gamble (NYSE: PG) has one of the longest-running dividend payments on the market thanks to its 60-year streak of consecutive payout boosts. But the stock has dropped off of many income investors' watchlists after a few years of subpar raises. The consumer goods giant hiked its dividend by less than 1% in 2016, and by just 3% the year before.
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Compare that to peer Kimberly-Clark (NYSE: KMB) and its 5% increases in both time periods. Yet for future dividend growth, P&G looks like the better bet for income investors today.
Better payout ratio
Both companies saw their payout ratios spike to over 100% of earnings in 2015 as foreign currency swings combined with economic volatility in key markets like Russia, Venezuela, and China to pinch revenue and profits.
The earnings slump was made worse by P&G's decision to begin selling off or discontinuing dozens of its brands. A portfolio reboot that management described as the biggest transformation in the company's history left it with 100 fewer brands overall that were responsible for approximately 15% of revenue and 5% of profits.
P&G annual dividend raises. Chart by author.
Now that the shift is behind it, P&G is in a much stronger position to boost dividends over the coming years. Its payout ratio has plunged back below 50% of earnings, in fact. Sure, some of that decline is a temporary side effect of its portfolio reboot. After all, the $9 billion of extra profit it booked from selling its beauty products won't repeat any time soon.
On the other hand, the company's aggressive cost-cutting has made it much easier to turn a profit, as has the fact that P&G removed many of the least-profitable brands in its portfolio. The company's 21% operating margin, compared to Kimberly-Clark's 18%, points to industry-leading dividend gains ahead.
Kimberly-Clark can cut costs, too, and in fact, the company plans to cleave at least $400 million out of its expense burden this year. And so, investors should focus more on their relative growth prospects for clues as to which company will deliver the bigger earnings gains over the long term.
Image source: Getty Images.
P&G has lost market share across its product divisions for two consecutive years. Its shaving business owned 70% of the global market for razors and blades just a few years ago, but competition has whittled the Gillette brand down to a 65% share recently.
Momentum is finally shifting in its favor, though. P&G booked surprisingly strong sales growth in each of the last two quarters to give management confidence to boost its full-year outlook. The company now sees fiscal 2017 organic sales speeding up to a 2.5% pace from 1% in the prior year. Kimberly-Clark, meanwhile, expects to log the same 2% uptick it saw last year.
Why pick Procter & Gamble
P&G believes its slimmer portfolio will grow at a 1% faster organic rate from here on out since it now mainly includes just its strongest brands like Pampers, Bounty, and Crest. Ideally, shareholders would like to see that improved pace come paired with market share gains, which might seem unlikely given its last two years of declines.
However, its track record for innovation and imposing positioning in the industry are core reasons P&G has been able to raise its dividend for 60 consecutive years, compared to Kimberly-Clark's 45-year streak. Those advantages haven't been wiped out over the last few disappointing fiscal years. They've just been temporarily offset by a weak global selling environment and an expensive brand-shedding process. As these conditions improve, P&G looks set to return to consistently strong annual dividend increases.
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