Better Buy: Kimberly-Clark Corporation vs. Philip Morris International

Big consumer staple stocks can often rebound from steep market downturns, thanks to the non-cyclical nature of their businesses. Two top names from that sector are Kimberly-Clark (NYSE: KMB) and Philip Morris International (NYSE: PM), which both recovered from big market meltdowns before.

Kimberly-Clark mostly sells paper-based personal care products, like Kleenex tissues, Huggies disposable diapers, Cottonelle toilet paper, and Kotex feminine hygiene products. Philip Morris International, which was spun off of Altria (NYSE: MO) in 2008, sells numerous brands of cigarettes -- led by its flagship Marlboro brand -- in overseas markets.

Image source: Getty Images.

Both stocks have outperformed the S&P 500's 7% gain since the beginning of the year -- PMI rallied 21%, and Kimberly-Clark gained 13%. However, past performance never guarantees future returns, so we should take a closer look at both companies' growth trajectories, challenges, dividends, and valuations to see if either stock is a better buy at current prices.

How fast are Kimberly-Clark and PMI growing?

Kimberly-Clark and PMI's growth figures are both weighed down by currency headwinds. That's because the weakness of certain currencies against the dollar reduces their revenues and earnings when they are reported in U.S. dollars.

Kimberly-Clark's total revenue fell 2% to$18.2 billion in fiscal 2016. Sales at all three main units (Personal Care, Consumer Tissue, and K-C Professional) dropped year-over-year. But on an organic basis -- which excludes currency impacts, acquisitions, divestments, and other one-time charges -- its revenue improved 2% on higher shipment volumes.

For the current year, Kimberly-Clark expects sales to rise 1%-2% as reported, and 1%-2% growth on an organic basis. That forecast indicates that its currency headwinds shouldfade to "neutral" levels as the dollar weakens and growth in emerging markets accelerates.

PMI's flagship Marlboro cigarettes. Image source: Pixabay.

PMI's total revenue, excluding excise taxes, dipped0.4% to $26.7 billion in fiscal 2016. But excluding an unfavorable currency impact of $1.3 billion, revenues actually rose 4.4%. On a reported basis, revenue rose in Europe and Asia, but fell in the EMEA (Europe, Middle East, and Africa) and Latin America/Canada regions. On a constant currency basis, revenue rose across all four regions even as shipments fell across all regions -- thanks to PMI's time-tested strategy of hiking prices to offset lower shipments.

For the current year, PMI expects its sales to rise 4%-6% after excluding currency impacts and acquisitions. The company still sees currency headwinds ahead, but it didn't offer a full-year forecast for its reported revenues.

The challenges and catalysts

The major threat to Kimberly-Clark's business model is competition from smaller brands across the world. Consumers in weaker economies like Brazil and Argentina are more inclined to purchase cheaper generic brands of tissues, diapers, or other paper-based products than Kimberly-Clark's "brand name" products.

A box of Kleenex. Image source: Pixabay.

Kimberly-Clark also faces tough competition in China -- which the company is trying to address with higher-end products like "premium" diapers. On the bright side, Kimberly-Clark can always buy out smaller regional brands to expand its market share -- although that could contradict its cost-cutting plans to save about$140 million per year.

The main challenge for PMI is to continue growing market share in countries with declining smoking rates. It also must fend off British American Tobacco (NYSEMKT: BTI), which is scaling up by acquiring Atlria's domestic rival,Reynolds American (NYSE: RAI).

For now, PMI plans to diversify its business and widen its moat by launching new non-cigarette products like e-cigarettes and "heatsticks". However, many analysts believe that the company might need to buy Altria to counterBritish American Tobacco's growing scale.

Profitability and dividends

Kimberly-Clark's adjusted earnings rose 5% in 2016, thanks to its aforementioned cost-cutting efforts and ongoing stock buybacks. Wall Street expects its earnings to grow 4.1% this year.

PMI's earnings grew 1.4% in 2016, or 11.8% on a constant currency basis. It expects earnings to rise 8%-11% as reported this year, or 9%-12% on a constant currency basis (excluding a tax charge in the first quarter). The narrowing disparity between PMI's reported and constant currency forecasts indicates that currency headwinds are fading. That might allow PMI to restart its buybacks, which have been halted due to unfavorable exchange rates.

Kimberly-Clark currently pays a forward yield of 3%, which is supported by a payout ratio of 62%. It's hiked that dividend annually for 44 years. PMI pays a forward yield of 38%, which is supported by a higher payout ratio of 92%. The company has raised that dividend every year since its split with Altria nine years ago.

The valuations and verdict

Kimberly-Clark trades at 21 times earnings, which is slightly higher than its industry average of 20. PMI trades at 25 times earnings, which is much higher than its industry average of 16.

Neither stock seems like a great value play with those valuations. But if I had to pick one of these consumer staples giants over the other, I'd stick with Philip Morris International. The company's fewer moving parts, wider competitive moat, and higher dividend all make it a more appealing investment than Kimberly-Clark, which is far too exposed to tough price competition in countries with wobbly economies and currencies.

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