Kimberly-Clark (KMB) and Colgate-Palmolive (CL) have a lot in common. They are both giants in the consumer staples sector, and both have raised their dividends for several decades.

Both stocks are Dividend Aristocrats.

The Dividend Aristocrats Excel spreadsheet has 51 stocks with 25+ consecutive years of dividend increases.

Kimberly-Clark has paid dividends for more than 80 years, while Colgate-Palmolive has paid uninterrupted dividends since 1895.

Kimberly-Clark has increased its dividend for 45 years in a row.

Colgate-Palmolive has an even more impressive dividend growth history. It has increased its dividend for 55 years, which also makes it a Dividend King.

The Dividend Kings Excel spreadsheet has just 21 stocks, each with 50+ years of consecutive dividend increases.

Both companies have very impressive dividend growth histories. However, this article will discuss three reasons why Kimberly-Clark may be the better Dividend Aristocrat to own moving forward.

Reason #1: Dividend Yield & Dividend Growth

Kimberly-Clark and Colgate-Palmolive are both impressive dividend stocks, due to their strong business models.

They each dominate their respective product categories, and command high market share, which yields pricing power.

Kimberly-Clark operates three core segments, which are as follows:

• Personal Care (50% of sales)
• Consumer Tissue (33% of sales)
• K-C Professional (17% of sales)

Kimberly-Clark manufactures tissues, paper towels, diapers, and other staples products. Its major brands include Huggies, Pull-Ups, Kleenex, Scott, and Cottonelle.

Colgate-Palmolive specializes in toothpaste, soap, and pet food. Its core brands include Colgate, Palmolive, Softsoap, Irish Spring, Tom’s of Maine, Ajax, and Hill’s.

Colgate-Palmolive has a tremendous history of paying dividends. In fact, it has paid a dividend for 122 years.

(Click on image to enlarge)

Source: Bernstein Annual Strategic Decisions Conference, page 106

Colgate-Palmolive has raised its dividend for a longer period of time than has Kimberly-Clark, but Kimberly-Clark has greater appeal for income investors going forward.

First, Kimberly-Clark has a significantly higher dividend yield than Colgate-Palmolive, 3.1% to 2.2%.

This could make a big difference for investors looking for income. Kimberly-Clark provides approximately 41% more dividend income than Colgate-Palmolive.

Not only that, but Kimberly-Clark could have higher dividend growth as well.

Both companies raised their dividends in 2017. Kimberly-Clark passed along a 5.4% dividend increase, while Colgate-Palmolive hiked its dividend by a more modest 3%.

Kimberly-Clark could continue to raise its dividend at a higher rate than Colgate-Palmolive in the years ahead, because of its stronger earnings growth.

Reason #2: Earnings Growth

Kimberly-Clark is performing much better than Colgate-Palmolive. In 2016, net sales fell 2%, but this was entirely due to a 4% reduction from unfavorable currency exchange.

Meanwhile, Kimberly-Clark’s fundamentals remain healthy. Organic revenue increased 2%, due to an increase in volumes.

In 2016, earnings-per-share rose 5% from the previous year, thanks to cost cuts and price increases.

By contrast, Colgate-Palmolive’s net sales declined 5% in 2016, to $15.2 billion. The company benefited from 2.5% pricing increases, but this was more than offset by a 3% decline in unit volumes.

One of Colgate-Palmolive’s greatest strengths is that it commands extremely high market share in toothpaste.

(Click on image to enlarge)

Source: Bernstein Annual Strategic Decisions Conference, page 11

Nevertheless, falling volumes are a concern that demand for Colgate-Palmolive’s products is deteriorating. Colgate-Palmolive’s adjusted earnings-per-share were flat in 2016, compared with 2015.

This trend could continue for the foreseeable future.

Kimberly-Clark management expects earnings-per-share of $6.20-$6.35 in 2017, which would represent 3%-5% growth from 2016.

This is largely due to volume growth, as well as expanding profit margins in Kimberly-Clark’s core Personal Care segment.

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Source: Q1 Results, page 5

Kimberly-Clark has employed an aggressive, company-wide cost-cutting program called ‘FORCE’, which stands for Focus On Reducing Costs Everywhere.

This program has yielded significant results. Cost savings totaled $435 million in 2016. This helped company-wide gross margin expand by 70 basis points last year.

At the same time, Colgate-Palmolive management sees flat earnings-per-share for 2017.

One of the major reasons for this discrepancy, is each company’s respective cost structure.

Colgate-Palmolive successfully expanded its gross margin by 180 basis points last year, but the bottom line did not experience the full effect, as these savings were somewhat offset by higher SG&A expense.

In addition, Colgate-Palmolive experienced higher raw materials costs in the fourth quarter of 2016, as well as the first quarter of 2017.

This particularly impacted the company’s core North America segment, which represents over 20% of total revenue.

On the other hand, Kimberly-Clark is benefiting from falling commodity prices, which have reduced its raw materials costs, including pulp.

Kimberly-Clark’s input costs were $65 million less in 2016 than the previous year.

As a result, Kimberly-Clark’s stronger volume growth and improvement from lower raw materials costs, will likely lead to stronger returns moving forward.

Reason #3: Valuation & Expected Returns

Lastly, Kimberly-Clark is more attractive valued, especially given its stronger growth potential.

Kimberly-Clark stock trades for a price-to-earnings ratio of 20.9, based on 2016 earnings-per-share. On this basis, Colgate-Palmolive stock trades for a price-to-earnings ratio of approximately 26.6.

Kimberly-Clark is also valued at a significant discount to the S&P 500 Index, which has an average price-to-earnings multiple of 26.

If Kimberly-Clark stock was to earn a market multiple, it could yield significant share price appreciation. At the same time, Colgate-Palmolive’s valuation multiple could contract, if earnings remain stagnant moving forward.

Colgate-Palmolive shares are valued at a 27% premium to Kimberly-Clark, which seems unjustified.

Combined with its higher dividend yield, Kimberly-Clark’s growth potential is likely to result in higher future returns than Colgate-Palmolive will offer.

A reasonable breakdown of each company’s potential returns is as follows.

Kimberly-Clark:

• 3%-5% organic revenue growth
• 1% margin expansion
• 1%-2% share repurchases
• 3.1% dividend yield

Colgate-Palmolive:

• 2%-4% organic revenue growth
• 1% margin expansion
• 1%-2% share repurchases
• 2.2% dividend yield

Going forward, Kimberly-Clark could generate total returns of approximately 8.1%-11.1% per year. Colgate-Palmolive’s annualized returns may be closer to 6.2%-9.2%, minus any contraction of the price-to-earnings multiple.

Final Thoughts

Both Kimberly-Clark and Colgate-Palmolive have strong product portfolios, with category-leading brands. And, they have both maintained impressive histories of raising their dividends each year.

Even if the U.S. were to enter a recession in the years ahead, there remains a very good chance Kimberly-Clark and Colgate-Palmolive will continue raising dividends, just as they did during the Great Recession.

However, if an investor were attempting to choose between the two, Kimberly-Clark stands out as the more attractive dividend growth stock at this point. It has better growth potential and a higher dividend yield, while Colgate-Palmolive seems to be a bit overpriced at the present time.

As a result, Kimberly-Clark is the winner in this matchup of two Dividend Aristocrats.