If you read many of my posts then you should know that I love Consumer Goods Companies (CGC). I wrote many times about beverage champions, such as AB InBev, but I am now trying to dig into the Household and Personal Care Products (HPC) sub sector. I think that, right now, this sub sector should be a part of any long term portfolio focused on quality and income stability because (a) HPC is a Defensive sector (it does best in times of macro uncertainty, but rarely under performs the S&P), (b) Valuations are in line with long term average for most stocks, and (c) Reasonable earnings consensus expectations assure that your portfolio will not suffer aggressive bumps going forward. In this post I will review three corporate leviathans and decide which one(s) would be the best candidate(s) for a prudent portfolio looking for a growing cash yield.
Colgate Palmolive Company (NYSE:CL), which is less than one third the size of PG, shows much better top line growth and margins than its biggest peer. While PG has better margins in the slowly growing developed world than CL (25% versus 20%), Colgate has considerably better margins in high growth Emerging Markets (30% versus 10%). It’s also relevant to mention that over 50% of CL’s sales come from Emerging Markets while just under 60% of PG’s revenues come from the developed world. CL also offers a great portfolio of products with low price elasticity and, hence, the company enjoys much better pricing power than most of its peers. Besides, CL is implementing a program to improve cost efficiency which, from its relative size, is in line with PG’s $10 billion plan. Growing sales at the 3 year average rate of 6% and trading at 2013 18x P/E while generating a 5% FCF yield I think CL is one of the names to own in this sub sector.
The Clorox Company (NYSE:CLX) is not a small company but, with a market capitalization of $10.2 billion, is still a possible M&A target. Even while the company’s growth potential is somewhat limited by its category and geographic exposure, CLX continues to grow ahead of its underlying categories, primarily as a result of strong innovation momentum and mix improvement. CLX has established a track record for shareholder value creation by showing capital discipline, not just in terms of cost savings, but also in M&A situations and by carefully prioritizing organic growth opportunities. CLX is my to pick within the HPC sector. I always try to stress that, as small passive investors, we benefit either from cash dividends or M&A activity. CLX, trading at 2013 17x P/E and with a 6.2% FCF yield, pays a 3.5% cash dividend yield and offers a potential M&A exit window. I just love this name at the current price.
This three companies should be perfect candidates for any portfolio looking for growth stability and a growing cash dividend yield. My personal pick is CLX above the others because I consider it a great M&A candidate going forward but CL is also a great company with an amazing Emerging Markets footprint. I consider PG fairly valued right now given its size and current turnaround efforts but it’s always a good portfolio option for any conservative investor.
The article Household and Personal Care Portfolio Candidates originally appeared on Fool.com and is written by Federico Zaldua.
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