By Renee O'Farrell
Big pharmaceutical companies such as Johnson & Johnson (JNJ) may receive a lot of credit for their medicines, but the personal products industry is nearly just as profitable. Plus, given the nature of products like toothpaste, toilet paper and cleaning products, and the strong brand loyalty that comes with it, companies in this industry tend toward stable performance, making them perfect as longer-term positions. Moreover, the big players in this industry also offer decent dividends, further adding to the benefits of investing in the personal products industry.
Kimberly-Clark (KMB) is the smallest of the big three companies in this industry with a market cap of just $31.25 billion. It recently traded for just under $80 a share, or 14.41 times its forward earnings, and pays a dividend yield of 3.71% on a payout ratio of 65.36%. Kimberly-Clark's earnings per share increased by 4.21% a year on average over the last five years. Going forward, analysts expect the company's earnings to increase at an average rate of 7.86% a year over the next five years.
Fund manager Ric Dillion is a fan of Kimberly-Clark (check out the positions in his Diamond Hill Capital). I, on the other hand, am not. The company has a decent presence in emerging markets, but I don't see it being able to turn a strong profit in this environment. Here is a company that keeps getting hit by rising inflation and increased marketing expenditures. Kimberly-Clark's recent cost-saving programs helped to offset that to a degree, but its operating margin has still been declining. Given the state of the market and the cost of commodities, I recommend passing on this company and choosing one with a more diversified product portfolio and location profile.
Colgate-Palmolive (CL) is the second largest company in the personal products industry. It has a market cap of $48.22 billion. Colgate-Palmolive is at just over $101 a share right now, or 17.01 times its forward earnings. The company also pays a dividend of 2.45% on a payout ratio of 45.67%. Over the past five years, Colgate-Palmolive's earnings swelled almost 15% a year on average. Consensus estimates put that rate at just under 9% a year over the next five years.
First Eagle Investment Management is a fan of Colgate-Palmolive, but I am not convinced. Even with the company's ongoing share repurchases, it isn't a good bet right now. Around 80% of Colgate-Palmolive's sales come from outside the US (primarily Latin America), making this company especially vulnerable to unfavorable currency translation and changing laws in the countries in which it does business, such as the 2012 expansion of price controls in Venezuela. Again, with the pressures facing this industry, I think a more diversified company is a better bet.
Procter & Gamble (PG) has a market cap of $174.60 billion making it by far the largest company in this industry. It recently traded at $64.57 a share. At that price, the company has a forward price to earnings ratio of 15.25 and pays a dividend yield of 3.53% on a 62.46% payout ratio. Procter & Gamble's earnings per share increased almost 10% a year over the past five years. Over the next five years, analysts say the company's earnings per share should go up 7.84% a year on average.
Warren Buffett's Berkshire Hathaway is bullish about Procter & Gamble (see what's in Berkshire Hathaway's portfolio). Donald Yachtman is also a fan of the company (read more about Yachtman's top positions here). Even Mad Money host Jim Cramer is recommending this stock as a buy right now and I have to agree. Procter & Gamble has great competitive strength through its broad product portfolio, large distribution network and strong presence in emerging markets. These factors will greatly offset some of the risks facing the personal products industry right now, such as rising commodities prices and a volatile consumer spending environment.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.