Consumer staples stocks are generally considered a safer bet amid challenging economic conditions due to the non-cyclical nature of goods like food, cleaning products and personal care items sold by companies in this sector. Also, these stocks are preferred by income investors for their consistent dividends and attractive dividend yields.
After experiencing a major spike in the demand for their goods due to stockpiling amid lockdowns, many consumer staple companies are now seeing a moderated sales growth rate. Keeping these changing trends in mind, we will use the TipRanks Stock Comparison tool to compare Kimberly-Clark and Procter & Gamble to see which consumer staples stock offers a better investment opportunity.
Kimberly-Clark (KMB)
Sales of Kimberly Clark, which is well-known for its brands like Huggies, Kleenex, Kotex and Scott, have been quite lackluster in recent years amid rising competition. In 2019, sales were almost flat at $18.5 billion. Panic-buying in the initial phase of the pandemic drove an 8% rise in Kimberly-Clark’s 1Q sales. However, 3Q sales grew 0.9% Y/Y to $4.68 billion, indicating that demand is returning to normal levels.
Organic sales growth in 3Q was 3% while adjusted EPS declined 6.5% to $1.72 due to higher expenses. The company’s Consumer Tissue segment continued to benefit from pandemic-led demand in 3Q and delivered organic sales growth of 10%. The Personal Care segment’s organic sales growth was 5%. However, organic sales of the K-C Professional segment were down 15% as sales to enterprises were impacted by the work from home arrangements.
Meanwhile, Kimberly Clark is trying to improve its sales through innovation with an emphasis on premium products. For instance, last year the company launched its most premium diaper in the US—Huggies Special Delivery, which comprises naturally sourced materials.
The company sees significant growth prospects in the international markets, especially in developing and emerging economies. Recently, it acquired Softex Indonesia for $1.2 billion in line with its efforts to accelerate its growth in the personal care category in developing and emerging markets. As per the company, Indonesia’s diaper market is the sixth largest globally and is projected to nearly triple in size over the next decade.
To improve profitability, Kimberly-Clark initiated a restructuring program in 2018 that aims to reduce its cost base by cutting down overheads and streamlining its supply chain. The company plans to close or sell about ten manufacturing facilities while expanding production capacity at some plants. Kimberly-Clark also intends to exit or divest some lower-margin businesses that contribute about 1% of the company’s overall sales.
As part of the restructuring program, Kimberly-Clark is also reducing its workforce by 5,000 to 5,500. The program is expected to be completed next year and generate cost savings in the range of $500 million to $550 million. The company is also pursuing its FORCE program to optimize its end-to-end supply chain.
Kimberly-Clark raised its full-year guidance following the 3Q performance and now expects organic sales growth of 5% and adjusted EPS growth in the range of 9% to 11%. (See KMB stock analysis on TipRanks)
In reaction to the recent results, Berenberg Bank analyst Fulvio Cazzol reiterated a Buy rating for Kimberly-Clark but lowered his price target to $177 from $181. He commented “We believe the lfl [like-for-like] sales slowdown for KC in 2021 could be less severe than the market expects. Visible Alpha expectations for 0.4% group organic sales growth in 2021 are too conservative (we forecast 1.4%).”
“In addition, improved execution, supported by higher investments and more agile operations, will underpin a higher market share performance in 2021 and beyond.”
The rest of the Street is cautiously optimistic about Kimberly-Clark. A Moderate Buy consensus is based on 3 Buys, 4 Holds and 1 Sell. With shares down 2% so far in 2020, the average analyst price target of $158.50 suggests a possible upside of 17.6% in the coming months.
Procter & Gamble (PG)
With brands like Tide, Gillette, Head & Shoulders, Pantene, Ariel and Pampers, Procter & Gamble has a strong presence in about 180 countries. Unlike many of its peers who are now experiencing moderated sales growth after the stockpiling phenomena amid lockdowns, consumer staples giant Procter & Gamble continues to enjoy robust demand as demonstrated by its recent results.
The company’s 1Q FY21 (ended Sep. 30) sales grew 8.5% Y/Y to $19.3 billion. Organic sales growth was 9% and reflected further strength compared to a growth of 6% in 4Q FY20.
Moreover, the company experienced sales and volume growth across all its key divisions in 1Q. Notably, Health Care and Fabric & Home Care divisions generated organic sales growth of 12% and 14%, respectively. Overall, robust sales growth and productivity cost savings helped in driving a 19% growth in 1Q FY21 EPS to $1.63 on an adjusted basis.
Following the impressive 1Q performance, Procter & Gamble raised its full-year outlook and now expects sales growth between 3%-4% and adjusted EPS growth in the range of 5%-8% in FY21. (See PG stock analysis on TipRanks)
Aggressive marketing and continued innovation are major aspects of Procter & Gamble’s growth strategy and are helping in gaining additional market share in key categories. Also, e-commerce growth is a vital part of the company’s strategic plans, especially amid the pandemic. In 1Q FY21, e-commerce sales grew 50% and accounted for 11% to 12% of the overall sales.
Further, under its current productivity and cost savings plan, the company is reducing costs in its supply chain, certain marketing activities and also bringing down overhead expenses. It recorded $1.5 billion pre-tax restructuring costs in FY20 and expects to incur restructuring costs in the range of $250 million to $500 million in FY21.
Meanwhile, Berenberg analyst Fulvio Cazzol increased his price target for Procter & Gamble to $156 from $149 after 1Q results. However, he reiterated a Hold rating, saying that further upgrades to the guidance are already priced in. The analyst expects more upgrades to the management guidance based on “Based on 1) a strong start to the year, and importantly a more diversified growth profile; 2) better-than-expected productivity, which is likely to be reinvested to support future growth; and 3) a strong execution track record.”
Turning to the rest of the Street, the Moderate Buy consensus breaks down into 9 Buys versus 4 Holds. With shares already rising 14% year-to-date, the average analyst price target of $153.46 implies further upside potential of 7.8%.
The Better Buy
Both Procter & Gamble and Kimberly-Clark are known for their consistent dividends. Currently, Procter & Gamble’s dividend yield of 2.22% is lower than Kimberly-Clark’s yield of 3.13%.
If we look at the most recently reported results, then Procter & Gamble definitely fared better than Kimberly-Clark and appears poised for strong long-term growth. However, taking into account more upside potential, lower valuation and a higher dividend yield, Kimberly-Clark would seem to be the better stock pick than Procter & Gamble currently.
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment
