Which Household Products Stock Is Most Attractive?

CL, CLX, KMB, PG, UL.  Titans of dividend growth investing.

Key Brands

Long term investors are attracted to companies with brand power that sell every day products consumers have to buy whether the economy is reaching new heights or we're stuck in the middle of a recession.  While I don't know which brand of smart phones consumers will favor 20 years from now, or what social media site will be all the rage.  I can tell you with certainty we will still brush our teeth, do laundry, wash our hair, and clean are homes.  Companies that sell these types of products are boring and will not make you rich over night.  In fact they usually command a higher than average valuation, which makes sense because the stock market loves certainty. 

What sets these companies apart from other consumer staples stocks (in my my mind) is the very nature of the products sold.  With cigarettes (MO, PM, LO) you have to deal with declining smoking rates and draconian government interference.  Sodas (KO, PEP) seem to face headwinds as consumers become more health conscious and move away from sugary beverages.  Staples retailers such as WMT appear to be doing well right now, but the industry is littered with failing businesses (K-Mart anyone?).  Look at the products and brands these household products companies sell.  If you're looking for a high quality company to hold the next 2-3 decades, here are some ideas:

Colgate-Palmolive (CL): Colgate, Palmolive, Softsoap, Fabuloso, Irish Spring, Speed Stick.
Clorox (CLX): Clorox, Pine-sol, Liquid Plumr, Kingsford, Glad, Brita, K.C. Masterpiece, Hidden Valley.

Kimberly-Clark (KMB): Kleenex, Scott, Huggies, Kotex, Depend, Poise, Viva, Cottonelle.  KMB has a professional division which include products such as napkins you might find at a food court and also has a healthcare business it plans to spin off into a separate company.

Procter & Gamble (PG): Tide, Gillette, Duracell, Crest, Pantene, Old Spice, Ivory, Charmin, Tampax, Pampers, Mr. Clean, Bounty, Swiffer, Febreze, Dawn, Cascade, Ariel, Gain, Pepto Bismal, Scope, Oral-B, Metamucil, Vicks, Bounce, Head & Shoulders, Herbal Essences, Cover Girl, Olay.  PG recently sold its Iams pet food business in an attempt to improve margins.

Unilever (UN/UL): Dove, Axe, Lux, Ponds, St. Ives, Surf, Tressemme, Vaseline, VO5, Ben & Jerry's, Bertolli, Hellman's, Knorr, Lipton.  Unilever is moving away from foods.  It is currently selling Ragu spaghetti sauce and sold Skippy peanut butter last year.

Valuation

CL: 20.6 times forward earnings

CLX: 20.1 

KMB: 16.8 

PG: 17.6 

UL: 18.5 

Colgate and Clorox are clearly the most expensive from the group based on current prices and forward earnings guidance.  I don't follow CLX and I'm actually really surprised to see it's almost as expensive as Colgate!  KMB stock should provide the most earnings per invested dollar.  Always important.

Capital Structure

CL:  80.3% debt / AA credit rating

CLX: 98.0% debt / A- 

KMB: 57.5% debt / A 

PG: 34.4% debt / AA 

UL: 44.5% debt / A+ 

As you can see from the credit ratings, all these companies are high quality and will not be going out of business anytime soon.  PG has the best balance sheet which is also backed by its AA credit rating.  CLX's use of heavy leverage is the reason I don't follow the company.  In general I prefer low leverage since I'm a conservative investor.  That said, if I was going to lever the hell out of a business, it would be something stable like a consumer products or an utility company.  Investors who are more daring might not be as concerned.

Growth (3-5 yr EPS growth estimates)

CL: 8.9%

CLX: 6.4%

KMB: 6.9%

PG: 8.4%

UL: 1.5%

This all important metric is what will fuel higher dividend payments in years to come for income investors like myself.  It will also fuel capital gains/total return for traders & those who plan to fund a retirement with asset sales.  I took the listed numbers from Fidelity.com, but it's important to note analysts are sometimes a bit too optimistic.  I look at it from more a relative basis meaning I would expect CL earnings to grow faster than the others, and UL's earnings to improve at the slowest rate.  With that in mind, analysts aren't terrible and they certainly have more insight than I do!  Anyways Colgate is expected to grow the fastest which might explain the high p/e.  Not looking so good for UL.  Deal breaker.

Dividend Safety

CL: 50.3% payout ratio

CLX: 68.0%

KMB: 58.2%

PG: 63.3%

UL: 66.4%

To calculate payout ratios I didn't use the standard trailing twelve month earnings you'll see plastered all over finance sites.  Those numbers are filled with one time restructuring costs, one time settlements, asset sales, and a bunch of other junk that will not affect a business moving forward.  Basically I don't trust those numbers and I want to use something better.  Instead I used Fidelity's adjusted actuals which strips out the one time events.  For example, Starbucks (SBUX) has a p/e ratio of 381 using the standard GAAP number.  Does that sound reasonable to you?  My way it has a p/e ratio of 30.5  Anyways the same principles work with payout ratios or anything based on trailing EPS. 

Dividends from each of these companies are safe at current levels, but as a whole I expect EPS growth to match or slightly outpace dividend growth from this point forward.  That trend seems to already ready be under way with lackluster increases from KMB and CLX this year.  Colgate has a bit more wiggle room.

Dividend Payments

CL: 2.12% yield / 51 year dividend growth streak

CLX: 3.28% / 37 years

KMB: 3.04% / 42 years

PG: 3.23% / 58 years

UL: 3.46% / 34 years

Since I invest for the sole purpose of building an income stream, I need to get paid!  Overall it's really easy to find a yield over 3% in this industry.  Take your pick with the exception of Colgate.  

A reader (thanks Mark!) emailed me evidence showing Unilever actually has a 34 year streak in British pounds.  Anyways these companies are all dividend champions with crazy streaks compared to average dividend stocks.

Conclusion

At current levels I'm most interested in KMB and PG.  PG most of all.

PG has a reasonable valuation compared to peers, a rock solid balance sheet, decent EPS growth expectations, and a safe dividend paying more than 3%.  I will consider adding additional PG shares to my portfolio if prices remain under $82.  Hopefully under $80... better yet $75.

I think CLX and UL are the worst options given current prices.

Finally valuations and expectations do change over time.  That's why I periodically check up on companies and recalculate fair values.  I did grab some Unilever shares a few months ago when its p/e ratio was lower and growth estimates were more optimistic.  I'm still not impressed with Clorox.  No plans to add it to my portfolio or watch list at this time.  Perhaps another day...