Which Is Best: Kimberly-Clark, Colgate-Palmolive Or Clorox Company?

Includes: CL, CLX, KMB
by: Alpha 7 Trading

I choose Household Products companies because generally, due to the trends and earnings predictability, they are considered defensive holdings. Also, these sorts of companies tend to gain much favor during weak economic periods with their offerings that are essential to everyday living, like toothpastes, soap and laundry detergents. Thanks to this uninterrupted demand for their products, even in depressed economic times, Household and Personal Products companies are very much immune to buyer cutbacks due to reduced household spending or product pricing increases. In difficult times, both top and bottom-line growth may loosen a bit; however, operations usually remain profitable as we are seeing currently, where the economic environment has bounced back a little, but is still not at its best, given continuing low employment levels.

Nevertheless, these companies are managing to generate consistent growth along with returning significant cash to investors. To achieve this growth, companies are working on mergers and acquisitions, investing in emerging markets, working on cost saving initiatives and also aggressively investing in their core brands and businesses. Consequently, companies in this industry managed to return 17.51% in the last year alone. Again and again, the return on equities for companies with the strongest brands has been in the double digits. In this article, I pick three of the best companies in this industry: Kimberly-Clark (NYSE:KMB), Colgate-Palmolive (NYSE:CL) and Clorox Company (NYSE:CLX), to analyze which one is best among these for steady returns.

Where Kimberly-Clark Stands

Kimberly-Clark comes in first among these three stocks. The company operates in four business segments: Personal Care, Consumer Tissue, K-C Professional and Healthcare. With well-known global brands, it has become an indispensable part of life for people in more than 175 countries. Kimberly has been consistently generating 4% to 5% top line growth with its targeted growth initiatives, innovation programs, and effective marketing and revenue realization strategies. Meanwhile, bottom line growth has also been strong, in the range of 8% to 9%, thanks to cost saving initiatives and efficient management. In the recent quarter, the company has generated organic sales growth of 5% and its bottom line expanded from $1.30 in the Q3 of 2012 to $1.42 in last quarter. Further, the company is expecting to generate EPS growth of 8% to 10% for the full year compared to EPS of $5.25 in 2012.

This consistent growth in sales and earnings permits Kimberly to generate increasing cash flows each year. Over the past two years, its cash flows increased from $2.2 billion to $3.2 billion. Moreover, the company has been paying uninterrupted dividends over the past 79 years and has been able to increase dividends for 41 consecutive years. Still, its free cash flows are nearly double its dividend payments of $1.2 billion. This allows Kimberly to work on buyback, and in this current year alone, it is seeking to repurchase $1.2 billion of common stock. On the whole, Kimberly's total returns to investors are standing at 17.64% over the past three years, which beats the industry average of 12.66% and S&P 500 total return of 15.32%.

Where Colgate-Palmolive Stands

Colgate-Palmolive is a consumer products company. It operates in two business segments: Oral, Personal and Home Care; and Pet Nutrition. Colgate is a well established and diversified company, with 80% of sales coming from outside the U.S., out of which roughly 50% of the sales are arriving from emerging markets that include Central Europe, Latin America, Asian regions and Africa. Colgate's strategy of developing and enlarging market positions in key product categories is working for the company, supporting its push for growth through cost cutting initiatives and effective asset utilization.

With this strategy, the company has been able to increase operating earnings and net income for the past ten successive quarters. In the recent quarter, its top line growth was at 1.5% and bottom line growth stands at 3%. On top, the company continues to have leading global market share in toothbrushes and toothpaste at 33.4% and 45.0%, respectively. Further, in the mouthwash category, its worldwide market share reached a record high of 16.8% at the end recent quarter. Looking forward, Colgate is seeking for EPS to grow by between 4.5% and 5.5% for the full year.

Colgate-Palmolive's consistent growth in earnings has enhanced its cash generating potential, as evidenced by its lofty price to cash flow ratio of 17.6. Its current cash flows are not only providing cover to dividends but are also offering room for further increases, as they are twice than dividend payments. In the TTM, its free cash flows are standing at $2.7 billion, while dividend payments are only at $1.3 billion. Consequently, it has been able to increase dividends by 71% in last five years. Strong free cash flows allow this company to keep reducing outstanding share count, and in the past twelve months, it has repurchased $1.7 billion worth of shares. In the past three years, its total returns to investors stand at 17.32%.

Where Clorox Company Stands

The Clorox Company is a leading multinational manufacturer and marketer of consumer and professional products with fiscal year 2013 revenues of $5.6 billion. It sells its products through mass merchandisers, grocery stores and other retail outlets. The company's strong brands, experienced management team and top-tier capabilities have allowed it to successfully navigate one of the toughest economic recessions on record. In the past three years, its total returns are standing at 17.31% above the industry average and S&P 500 TR but marginally below from the above two industry peers.

Over the past five years, though the company's top line growth was a bit slow at 1.29%, nevertheless, their bottom line growth is attractive at 5.82% on average over the same period. Clorox's strong earnings growth enhanced its cash flow potential, which further enabled it to raise its dividend from $1.60 to $2.56, an increase of 60%. Now the company has compiled and introduced its new 2020 strategy. As per this plan, the company seeks to balance its resources against sustaining a healthy core anchored in its U.S. retail business, while looking for growth opportunities in lucrative, margin-accretive areas adjacent to its core businesses.

With this strategy, the company is looking to generate 3% to 5% annual growth in net sales, a margin expansion of 25-50 basis points annually, and a free cash flow of 10% to 12% of sales annually. Clorox appears to be on track with this strategy, as it reported 2% net sales growth and 3% growth in diluted net earnings per share [EPS] at the end of first quarter. Their current dividends payments are safe, enjoying full cover from free cash flows. Based on it 2020 strategy, Clorox's dividend growth looks safe, supported further by its plan to generate free cash flow of 10% to 12% of sales.

Final Notes

The Household and Personal Products industry continues to be reasonably reliable as a safe haven for conservative investors. In particular, the top three companies I have discussed in this article have generated strong returns for investors, which are above S&P 500 TR over the past three years. Further, I firmly believe that because they produce products essential to everyday living, these companies will continue to generate strong returns for investors in the coming years as they have been doing over past decades. Finally, I believe Kimberly-Clark is in better position to outperform its industry peers, boasting the potential to generate consistently superior growth in top and bottom line.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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