I choose Household Products companies generally because of trends and earnings predictability, and because they are considered defensive holdings. Also, these sorts of companies tend to be better loved during weak economic periods as their offerings are essential to everyday living. Products like toothpastes, soap and laundry detergents are considered essentials. Thanks to an uninterrupted demand for products, even in depressed economic times, household and personal products companies are very much immune to buyer cutbacks with 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, at a time when 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. Companies in this industry have managed to return an average of 17.51% in the last year alone. Again and again, the return on equity for companies with the strongest brands has been in the double digits. In this article, I picked Colgate-Palmolive (NYSE:CL) to see where it stand in this industry compared with Kimberly-Clark (NYSE:KMB) and the Clorox Company (NYSE:CLX), to analyze which one is best among these for steady returns.
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 eleven successive quarters. In the recent quarter, its top-line growth was at 2% and bottom-line growth stood at 4%. On top, the company continues to have leading global market share in toothbrushes and toothpaste at 32.8% and 44%, respectively. Further, in the mouthwash category, its worldwide market share reached a record high of 17%, an increase of 130 basis points over the past year. Looking forward, it should continue the strong top-line momentum into 2014, fueled by new products across all categories and in all geographies.
Colgate-Palmolive's consistent growth in earnings has enhanced its cash generating potential, as evidenced by its lofty price-to-cash flow ratio of around 17.6%. The current operating cash flows are not only providing coverage for dividends but are also offering room for further increases, as they are twice dividend payments. In 2013, CL's operating cash flows stood at $3.2 billion, while dividend payments were only at $1.3 billion. Consequently, CL has been consistently able to increase dividends over the past 5 decades. Strong cash flows further allow the company to keep reducing outstanding share count, and in the past twelve months, CL has repurchased $1.5 billion worth of shares. Further, the latest dip in the stock price can be an attractive opportunity for steady, long-term investors to take a position when year-to-date the stock is trading at its lowest point.
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. KMB has been consistently generating 4% to 5% in 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. At the end of 2013, the company generated organic sales growth of 4%, with 9% growth in K-C International, and with product innovations penetrating the markets. The company has improved its operating margin by 90 basis points, with the cost saving initiatives, and consequently, earnings per share gone up by 10%.
KMB is looking to further execute its Global Business Plan. Based on the plan, Kimberly will chase targeted growth initiatives with product innovations and back its growth initiatives with increased advertising. The company is aggressively looking for cost savings in order to spend more on advertising its brand and research spending. This strategy further enhances its cash generating potential. Though operating cash flows were short from the previous year, still the company managed to return $2.4 billion to shareholders through dividends and share repurchases. KMB is further looking to increase its dividends by 2% to 4% and will mark its 42nd consecutive year with an increase as it seeking to buy back 1.3 billion to 1.5 billion of common stock. All these positive indicators keep the stock's momentum in 2014 improving. I believe it's a good idea to hold onto KMB to gain big profits.
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. 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 posted half its percentage of net sales growth and is looking for 2% growth for the full year of 2014 and EPS in the range of $4.40-$4.55, a decline of 5%. The company has the ability to address these challenges by working diligently on its business strategy with product innovation, cost savings, and marketing campaigns, and by reaching new markets. Their current dividends payments are safe, enjoying full cover from free cash flows. Based on its 2020 strategy, Clorox's dividend growth looks safe, supported further by its plan to generate free cash flow of 10% to 12% of sales.
After reaching a 52-week high of around $96/share, the stock is on the decline with the recent fed initiatives and mild growth in its quarterly results. Year-to-date, the stock is down around 9%. I recommend holding the stock and not selling during the decline, as the company has the ability to generate steady growth by working on its 2020 strategy. On the other hand, the company's dividends look completely safe with the potential to generate large amount cash flows.
The Household and Personal Products Industry continue 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 and Colgate-Palmolive is in a better position to outperform its industry peers, boasting the potential to generate consistently superior growth in top and bottom-line results.
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.