Clash of the Titans: Procter & Gamble vs. Kimberly-Clark

Includes: KMB, PG
by: Gordon Barrett

Long ago, I bought Kimberly Clark (NYSE:KMB), thinking that it is a wonderful company with brands that touch people from the moment they're born, brands that are trusted and needed to get by in life. A friend challenged me, asking why I didn’t buy Procter & Gamble (NYSE:PG) instead. Let's compare them here.

What could be a better company than KMB? It turns out that even though KMB owns many great franchises, including Scott, Huggies, Depends, and Kotex, Procter & Gamble may be the better long term investment. The reason is that PG seems to leverage their franchises and produce returns on equity better.

Don’t get me wrong, I love KMB. In the same way Buffet liked Gillette, because 50% of the population has to wake up and shave his face and the other 50% has to shave her legs, I like KMB. With KMB we know every baby has to wear diapers. Every girl has to address her “time of the month”. Everyone who uses the restroom has to…well you know. Every nose that sneezes has to get wiped. Even seniors now are using adult “pants” to have more confidence. The point is this company owns great franchises that are trusted by consumers. People buy their tampons by name. This is good.

The thing is, PG is a collection of great franchises too. Crest, Gillette, Iams, Pampers, Dawn, Tide, Folgers are just a few of the brands at PG. This company surely is a big castle with a big moat as Buffet says. By the way, PG is one of Berkshire Hathaway’s (NYSE:BRK.A) (NYSE:BRK.B) top 4 common stock holdings.

We know that in these volatile times, either company is a safe equity investment. That is to say that both are relatively free from an investor experiencing a permanent loss of capital. In fact, one would do quite well buying either and not looking at a ticker tape for years. The question is: would it be better to buy both or does one have better economics such that an investor would be better served concentrating into one of these fine consumer companies.

Let's look at some important facts and determine earnings power, which is the key ingredient for the true investor.

Both companies operate franchises that are needed or desired, free of government regulation and have no close substitute as perceived by the consumer.

They both have economics that constitute a “castle with a moat” situation. There are big barriers to taking these guys business away. I would say if you had access to millions of dollars you could not take one point of market share from either company. More simply stated, I don’t believe PG would be forced to give up shelf space at Wal-Mart (NYSE:WMT) for some new razor. Having said that, we can be reasonably sure these guys will be leaders ten years from now and therefore we know we are investing not speculating.

The basic numbers we can use to qualify the businesses for investment making sure we have a margin of safety are: return on equity, earnings power, the p/e ratio, the irr, and the earnings growth rate.

My favorite metric, and the one I think is most telling, is return on equity. Procter & Gamble simply does a better job earning a return off $1of equity. PG has a 33% ROE on average over the last 10 years. KMB has returned 28% on equity on average over the same period. The S&P returns something like 12%. These numbers show their moats at work. PG does a little better.

As for earnings, a quick check will show you PG’s earnings are a little more consistent and they are growing faster at roughly 10%…KMB’s are a little less consistent and growing at just about 8%.

PG edges them out again.

As for what you have to pay to buy them. PG sells for approximately 19x 08 earnings while KMB sells for 14x 08 earnings. Here KMB is relatively less expensive.

You would receive an initial rate of return on PG of 5% and an irr of 7% with KMB. Here KMB seems to return more in the immediate.

So what do we conclude? PG earns a better return on equity and is growing earnings faster - this would represent more value but we have to pay less relatively into KMB giving it value on that side. In short, you have to pay more for the better earnings at PG though KMB does provide a larger dividend yield at 3.24% vs. 2.16%. I would either buy both or I would buy PG as Buffet did.

Merry investing.