My simple answer, dear investors, is that instead of selling all your stocks, you should “get big and get boring.” Find big, dependable blue-chip stocks with boring, necessary product lines to generate some dividend income over the slow summer months. For me, three stocks fit this bill: The Procter & Gamble Company (NYSE:PG), Kimberly Clark Corp (NYSE:KMB) and Colgate-Palmolive Company (NYSE:CL).
Get big and get boring
The Procter & Gamble Company (NYSE:PG), Kimberly Clark Corp (NYSE:KMB) and Colgate-Palmolive Company (NYSE:CL) produce some of the most well-known consumer brands in the world. Each company generates a lot of revenue from overseas markets and pays strong dividends. Let’s take a fundamental snapshot of these three consumer giants.
P/E (ttm) | P/S (ttm) | P/B | Return on Equity (ttm) | Debt to Equity (ttm) | Profit Margin | Dividend Yield | |
Procter & Gamble | 17.50 | 2.69 | 3.42 | 17.51% | 49.65 | 15.50% | 3.00% |
Kimberly-Clark | 22.49 | 1.93 | 8.70 | 35.62% | 140.98 | 8.58% | 3.10% |
Colgate-Palmolive | 22.89 | 3.32 | 25.95 | 106.71% | 218.83 | 14.47% | 2.30% |
Advantage | P&G | Kimberly-Clark | P&G | Colgate-Palmolive | P&G | P&G | Kimberly-Clark |
Source: Yahoo! Finance, 4/25/2013
It’s easy to see that, based on fundamentals, The Procter & Gamble Company (NYSE:PG) is the cheapest of the bunch, while Colgate-Palmolive Company (NYSE:CL) has the strongest growth potential. A look at the top and bottom-line growth of these three companies over the past three years also reveals this trend.
Let’s break down these three companies in detail and see which one is the best value.
Procter & Gamble
Procter & Gamble creates a wide variety of household products, such as Tide laundry detergent, Pantene shampoo, Gillette razors, Bounty paper towels and Crest toothpaste. P&G’s fabric care & home care segment was its most important segment in 2012, generating 32% of its top line.
Shares of The Procter & Gamble Company (NYSE:PG) plunged recently after the company reported its third quarter earnings. The company earned an adjusted $0.99 per share, up from $0.94 per share in the prior year quarter. Organic sales, which exclude currency impacts and acquisitions, rose 3%.
Both its top and bottom line growth exceeded analyst estimates, but bleak guidance spooked investors. P&G expects its full year earnings to miss the consensus estimate of $4.37 per share by up to $0.41.
P&G is well diversified internationally, with only 19% of its annual revenue coming from North America. Unfortunately, crisis-stricken Western Europe, generating 39% of its top line, is its most important market, while Latin America, which was hit by inflation and currency devaluation crises, comprises 10%. Asia makes up 18% of its sales, while the rest comes from other regions.
The Procter & Gamble Company (NYSE:PG)’s big problem is its lack of U.S. exposure. While it was a good idea to expand into a wide range of emerging markets prior to the financial crisis, the global economy has changed substantially. P&G now finds itself simultaneously exposed to China’s slowdown, Latin American inflation (especially Venezuela’s currency devaluation), and weakening spending power across Europe. Meanwhile, it doesn’t have enough exposure to North America’s stronger economy to offset those losses, despite the success of some new products, such as single-use Tide Pods. All P&G can do now is slash prices to hold onto market share in its international markets.
Kimberly-Clark
Kimberly Clark Corp (NYSE:KMB), on the other hand, is in better shape than The Procter & Gamble Company (NYSE:PG) thanks to its higher exposure to North America, which comprised 49% of its 2012 top line. It only generates 15% of its sales of Europe, and a combined 36% from Asia, Latin America and other markets. Kimberly Clark Corp (NYSE:KMB) produces high-margin household products such as Kleenex tissue, Cottonelle toilet paper and Huggies diapers.
Shares of Kimberly Clark Corp (NYSE:KMB) rallied after its recent first quarter earnings, after the company reported adjusted earnings of $1.48 per share, up from $1.24 per share a year earlier. Organic sales rose 3% due to strong sales in the same international markets that P&G has struggled. This was mainly due to strong demand for its two key products – tissues and diapers.
Demand for tissues soared due to the flu season, and toilet paper sales were aided by a supply shortage from Georgia-Pacific, the maker of Angel Soft and Quilted Northern toilet paper. Meanwhile, sales of its Huggies diapers rose 50% in China and 10% in Russia. However, diaper sales were lower in the U.S. due to lower birth rates. The company intends to introduce more adult diapers in both North America and international markets to help balance out demand.
Unlike The Procter & Gamble Company (NYSE:PG), Kimberly Clark Corp (NYSE:KMB) raised its full-year guidance, and now expects to earn $5.60 to $5.75 per share for the full year, up ten cents from its prior guidance and exceeding analyst expectations.
Colgate-Palmolive
Colgate-Palmolive Company (NYSE:CL), which produces Colgate toothpaste, toothbrushes, Speed Stick, Irish Spring, Palmolive, Softsoap, Ajax and Science Diet, trades at the highest premium of these three consumer product giants. Like P&G, Colgate generates most of its sales overseas. In 2012, 78% of its sales came from international markets. Latin America is Colgate-Palmolive Company (NYSE:CL)’s most important region, comprising 29% of total sales. Approximately 50% of Colgate’s total sales come from emerging markets.
Last year, sales in Latin America rose 1.5%, but major problems in Venezuela – including a labor slowdown, inflation and the eventual devaluation of its currency – cut its operating income by 4%. Colgate’s problems in Venezuela show the dangers of being too exposed to emerging markets. Companies such as Colgate and P&G were able to slash costs in the past to compensate for currency fluctuations, but the strong dollar and unstable global currencies are rendering that tactic obsolete.
However, global demand for oral care products, Colgate-Palmolive Company (NYSE:CL)’s main source of revenue, is expected to continue growing as the global population grows. Odlum Brown analyst Stephen Boland noted in a report, “Per capita consumption of toothpaste in the U.S. is about 550 grams per year. In China, this figure is about 250 grams and in India it is about 125 grams.” This means that there is still a lot of room to grow in China and India, despite fears that these two markets are rapidly maturing. Colgate currently controls a whopping 45% of the global toothpaste market as well as nearly a third of the manual toothbrush market. This dominant position gives the company excellent pricing power against its rivals.
At the time of this writing, Colgate-Palmolive Company (NYSE:CL) has yet to report its first quarter earnings. However, I won’t be surprised if the stock pulls back slightly post-earnings, given its high P/E ratio. This could give investors a good opportunity to start building a position in this simple, stable business.
The Foolish bottom line
I believe that out of these three consumer giants, The Procter & Gamble Company (NYSE:PG) is the weakest, while Kimberly Clark Corp (NYSE:KMB) and Colgate have brighter prospects down the road. International exposure can be a blessing, as long as a company has the right products. P&G’s mix of detergents and soaps lacks the strength of Kimberly-Clark’s tissues and diapers, as well as the market dominance of Colgate-Palmolive Company (NYSE:CL)’s toothpaste and toothbrushes.
Therefore, I believe that investors should look for weakness in these three names and consider buying them in preparation for a summer that’s sure to be filled with drama and market turbulence.
The article It’s Time to Get Big and Get Boring originally appeared on Fool.com and is written by Leo Sun.
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