The Household and Personal Products Industry provides solid downside protection in challenging periods and performs well during healthy economic times. The industry has returned nearly 7.7% in the past five years, a timeframe that has been considered one of the toughest economic periods with higher commodities prices in the past few decades. Due to product diversification and extensive market exposure, the Household and Personal Products Industry sales and earnings streams are relatively steady throughout the business cycle.
In order to enhance consistent growth, the industry also makes divestitures and acquisitions. Managements always look to acquire small outfits or product lines that will go together with existing offers. These types of mergers and acquisitions help to adjust market strategy and/or enhance operating efficiencies. These mergers and acquisitions also help to sustain top- and bottom-line growth.
Emerging markets and overseas expansion always provide an opportunity for these companies to push sales and earnings. North America, Latin America, Europe, and Asia/Pacific regions are the largest, most attractive emerging markets for companies operating in this lucrative industry. Product innovation is another means to capture shares in new emerging markets. Also, brand equity is a decisive competitive consideration.
In this article, I pick the four best companies from the household and personal product industries for their consistently growing returns. These companies all have solid financial statements to back continuing returns for shareholders. Each company's business prospects and financial status has been evaluated to determine its ability to uphold increasing returns for investors.
How Procter & Gamble (PG) Is a Safe Investment
Procter & Gamble has been pushing its dividend for the last 57 consecutive years. The company currently offers a quarterly dividend of $0.6015/share, yielding at 3%. With a principal focus on value creation, it is strengthening and accelerating productivity plans. Procter & Gamble's business plan is simple and safe.
Procter & Gamble continues to invest in core brands, which are its major innovation opportunities. The company continues to make investments in its core developers and most promising and potential developing markets. With this business strategy, it is expecting top-line growth to be between 3%-4% and bottom-line growth to be between 5-7% by the end of 2014.
Together with a productivity improvement program, Procter & Gamble is looking to cut operational expenses to enhance margins and earnings. It is looking to save $10 billion by 2016, and it is seeking to reinvest this money in key emerging markets, product innovation and core business products. The cost savings will further enhance Procter & Gamble's financial flexibility. This will also allow it to concentrate on marketing activities and product innovation.
Its cash flows are also increasing with the growth in sales and earnings. Procter and Gamble has strong free cash flow, which is providing absolute coverage to its dividend payments. At the end of recent year, its free cash flows were at $10 billion, while dividends are standing at only $6.5 billion.
PG has sufficient cash on hand to invest in growth opportunities and for stock buybacks after paying for dividends. PG's price-to-cash-flow ratio of 15.8 also demonstrates its cash-generating potential. PG is set for big profits with product innovation, productivity gains and significant emerging market exposure.
How the Clorox Company (CLX) is a Safe Investment
The Clorox Company is a manufacturer and marketer of consumer products. It sells its products through mass merchandisers, grocery stores and other retail outlets. At present, Clorox offers a quarterly dividend of $0.71/share, yielding at 3.38%. Clorox has a long history of dividend increases and has managed to increase dividends each year since 1977.
This company operates in categories where competitive pressure is tough. However, its brand power is incontestable, as about 90% of its products hold first or second place. It operates in four business segments: Lifestyle, Cleaning, Household and International. All four segments are generating solid profits with product innovation across multiple brands.
At the end of fiscal 2013, Clorox had generated 3% sales growth. This growth includes 80 basis points of gross margin expansion. With solid brands and strong business prospects, Clorox is projecting to generate sales growth by 3% to 4% and EBIT margin up 25-50 basis points. Clorox's manageable payout ratio of 59% is also better than industry peers.
Its price-to-cash-flow ratio of 14.4 also presents an encouraging sign for dividend investors. Clorox has the ability to generate strong cash flows. The company has been generating 13% of FCF as a percent of sales over the last 10 years. Therefore, its free cash flows are adequately covering its dividends payments.
How Kimberly Clark (KMB) is a Safe Investment
Kimberly-Clark is seen as one of the best and safest companies for income-oriented investors. At the moment, it pays a quarterly dividend of $0.81/share, yielding at 3.32%. In the last five years, it has stretched its annual dividends from $2.12/share to $3.24 per share in this current year.
Its well-known global brands are turning out to be an essential part of people's lives around 175 countries. Almost 25% of the world's population trusts K-C brands. It is operating in four business segments: K-C Professional, Personal Care, Consumer Tissue and Health Care.
Over the years, its K-C brand has generated strong financial results to support both dividend and price. Due to European strategic changes and pulp and tissue restructuring, it lost nearly 2% of sales. Nevertheless, it has managed to grow the bottom line by 6% in the most recent quarter. It is efficiently working on cost saving plans, which led K-C to increase its operating profit by $80 million in the past quarter alone.
Trailing twelve months
Operating cash flow
Free cash flow
On the other hand, Kimberly-Clark has been generating strong cash flows to uphold its dividend payments. In the trailing 12 months, its free cash flows are standing at $2.2 billion when dividend payments are only at $1.1 billion. It appears K-C's dividends are sustainable as long as its free cash flows provide full coverage to its dividend payments.
How Unilever PLC (UL) is a Safe Investment
Unilever PLC is a supplier of fast-moving consumer goods. Its four principal areas of operations are: Personal Care, Home Care, Foods and Refreshment. At the moment, Unilever offers a quarterly dividend of $0.3545/share yielding at 3.51%. In the past, an extremely decentralized and complex structure hindered Unilever's ability to realize its potential for growth and profitability. But management's efforts to root out inefficiencies are looking to generate momentum.
At the end of the recent quarter, it has generated 5.0% growth in underlying sales with emerging markets up 10.3%. These results clearly make obvious that the restructuring of business is generating sustainable growth. Unilever's four business segments are generating strong profits with healthy margins. Particularly, its Home Care and Personal Care segments have shown strong growth of 7.7% and 10% in the last quarter alone.
Its other two business segments are also showing moderate growth with the re-launch of Lipton Yellow Label, and the ongoing success of baking bags and Knorr jelly bouillons. Its strong innovative culture becomes a key driver of growth with the launch of products like deodorants, Vaseline Spray & Go and Magnum 5 Kisses.
Its emerging markets footprint and strong innovation pipeline gives a wide economic moat. Its strong cash position also enables it to sustain dividends for investors. Its free cash flows are adequately covering dividend payments. This company has sustained a manageable payout ratio of around 60%.
The Household Products Industry is full of diversification. This group of companies offers hundreds of products we used in and around the home. Product diversification is a key characteristic behind the success of this group. These equities can be classified as defensive investments.
These four companies are generating strong profits and have solid business plans to continue this growth. Procter & Gamble is working on a smart business plan that is working so far. Clorox's solid brand and potential to generate strong cash flows make it a buy for dividend investors. Kimberly-Clark is restructuring its business and making moves for margin expansion. With its recent moves and solid K-C brand, Kimberly-Clark is well set for big profits. Finally, Unilever is a buy for the long haul.