Since 2013, bigger brand Procter & Gamble has evolved into a leaner machine by shedding 100 brands and selling off pet food, battery and beauty businesses. On the other hand Kimberly-Clark, the seller of Kleenex tissues and Huggies diapers, has long been a dividend-rich, income earner's favorite with a nearly 3% yield and 43 years of dividend growth. This is a closer fight than you'd think.
Both Procter & Gamble and Kimberly-Clark shares are up 4%-5% year to date. Dividend yields of both stocks are almost identical, too, hovering in the 3% range. If Kimberly-Clark's over four decades of growing dividends impresses you, Procter & Gamble stock has paid rising dividends for 59 years! However, this is where the similarities end.
While Procter & Gamble investors are trying to forget their losses in 2015, whereas Kimberly-Clark shareholders are on track for the sixth straight year of annual gains in 2016. The past five years have seen a lot of changes in Procter & Gamble, with its portfolio of brands revamped and several strategic changes. Earnings per share growth, partly as a result of such moves, was less than 0.5% per year in this period. However, Kimberly-Clark logged close to 5% EPS growth annually in the past half a decade.
Going forward, Procter & Gamble is expected to accelerate EPS growth to 6.13% every year but still under-perform the projected growth expectation of 7.4% per annum for Kimberly-Clark. Simply put, Kimberly-Clark continues to hold the edge over Procter & Gamble in terms of earnings growth. However, Procter & Gamble stock trades at a higher PEG ratio of 3.74 versus KMB's 2.95 PEG ratio.
Industry-beating EPS growth is some time away at Procter & Gamble. It's working to course-correct from entering too many new markets quickly and failing to bring new products to market that win with consumers. Starting in July, Procter & Gamble CEO David Taylor will add the title of chairman, succeeding longtime company leader A.G. Lafley. However, don't expect any massive directional changes.
While Kimberly-Clark with its solid brand mix and old relationships with retailers has garnered a narrow economic moat, it's far more leveraged in terms of debt/equity than Procter & Gamble. At the end of the day, for some investors a healthier balance sheet is far important than growth. Yet, over the 10 years (2006-2015), Kimberly-Clark stock has out-performed Procter & Gamble shares in as many as in seven years.
Make no mistake, Procter & Gamble is five times the size of Kimberly-Clark in terms of market cap. Also, the consumer goods giant is a far more profitable company (12.74% TTM) than Kimberly-Clark (5.93%). So, if you like the comfort of big and profitability, you should stick with Procter & Gamble. However, if growth is your number one priority, Kimberly-Clark is a better choice.
The verdict: Growth, cheaper valuations and a lack of serious headwinds (unlike Procter & Gamble) will, in our opinion, hold Kimberly-Clark in a better position. With Procter & Gamble unlikely to beat Kimberly-Clark in terms of earnings, growth-focused investors should continue to prefer Kimberly-Clark even though larger peer Procter & Gamble with its big balance sheet and turnaround theme may seem appealing.
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.