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Are Kimberly-Clark and Procter & Gamble Worth Buying Now?

NEW YORK (TheStreet) -- NEW YORK (TheStreet) -- Among consumer staple stocks, two investor favorites are Kimberly-Clark (KMB - Get Report) and Procter & Gamble (PG - Get Report). Both are priced with hefty forward one-year price-to-earnings ratios between 16.5 and 18, and both face challenging headwinds.

As of 3:30 p.m. on Tuesday, Kimberley-Clark stock was at $108.50, up 4% year to date. Procter & Gamble was at $81.42, down 0.1% year to date.

Kimberly-Clark reported first-quarter 2014 earnings on Monday, April 21, with earnings per share of $1.48. That was slightly better than the $1.47 analysts were expecting, according to Yahoo! Finance.

The same groups of analysts anticipated quarterly revenue of $5.32 billion. The actual number was $5.3 billion, a 1% decrease compared to the year-ago period. As the following 12-month chart clearly demonstrates, shares of Kimberly-Clark have performed well.

KMB Chart

KMB data by YCharts

Since the Oct. 8, 2013, low of $93.12 to the 52-week high last Friday of $113.09, shares of Kimberly-Clark had a remarkable run-up of over 21%. Now the shares are experiencing a well-deserved correction.

The company's amazing revenue-per-share growth may have topped out for the time being. On Tuesday, April 22, shares of Kimberly-Clark fell below the 50-day exponential moving average. This offers an auspicious chance to begin accumulating if you don't own the stock.

The next important support level is the 200-day exponential moving average of $104.34. It makes sense to be patient and average down on purchases of Kimberly-Clark.

The key financial number that concerns me is Kimberly-Clark's cash generated by operations in the first quarter of 2014, which was $437 million, compared to $607 million in 2013. Higher pension contributions and increased working capital costs were the reasons given by company management.

Investors need to make sure the company's free cash flow is enough to support its generous $3.36 annual dividend. At a share price of $109, that offers a yield of 3.08%. The 60% payout ratio may limit how much the company increases the dividend this year.

Besides it profitable businesses and dividend, one big reason for Kimberley-Clark's share price performance is the promise of a pending spinoff. Last November the company announced plans for a tax-free spin-off of its health care business. The proposed spinoff would create a stand-alone, publicly traded health care company with approximately $1.6 billion in annual net sales in both surgical and infection-prevention products and medical devices.

The spinoff is expected to be completed by the end of the third quarter or sometime in the fourth quarter of 2014, assuming board approval and subject to market, regulatory and other conditions.

Looking ahead, Kimberly-Clark's management guided for earnings-per-share growth in 2014 between 4% and 7%, but revenue may only increase by less than 3%. That may put a lid on the upside target price, which I calculate to be about $116.

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