P&G (PG) has a longer history of dividend growth than Clorox (CLX). That said, Clorox is no slouch when it comes to dividends. Clorox has increased its dividend each year since 1977, a streak of 40 years. P&G has increased its dividend for 61 years in a row. Both P&G and Clorox are members of the Dividend Aristocrats, a group of 51 stocks in the S&P 500 Index with 25+ years of consecutive dividend increases. You can see the entire list of 51 Dividend Aristocrats here. Not only is P&G a Dividend Aristocrat, but it is also a Dividend King, which is a stock with 50+ years of consecutive dividend increases.

Including P&G, there are just 19 Dividend Kings. To see all 19 Dividend Kings, click here. If an investor were trying to choose between the two, this article will discuss why P&G might be a more attractive dividend stock than Clorox.

Growth Potential

Both Clorox and P&G are performing well. Clorox grew sales by 4% last quarter, due to 7% growth in volumes. Earnings-per-share increased 8%. Over the first three fiscal quarters of the year, Clorox grew sales and earnings-per-share by 4%. It has a diversified product portfolio, which consists of household cleaning products, food, and cat litter, among others. Clorox benefits from a strong product portfolio. Over 80% of its U.S. products hold either the number one, or number two market share positions in their respective categories.

Source: June 2017 Investor Presentation, page 2

Clorox has exhibited strong growth rates, but P&G’s growth is more impressive. P&G generated 15% earnings growth last quarter, in constant currencies. Over the first three fiscal quarters, core earnings-per-share rose more than 10%. One of the biggest reasons for P&G’s strong earnings growth is its huge portfolio restructuring. It has sold off dozens of brands that represented low-growth categories. Some of the jettisoned brands include Duracell and a portfolio of more than 40 beauty brands. The goal of the restructuring is to slim down and become more efficient. Going forward, P&G will focus on just 65 brands, which could help it return to higher growth rates. P&G’s earnings growth should benefit from a more streamlined cost structure. P&G has realized $10 billion in cost savings, as a result of its restructuring.

Last quarter, P&G’s selling, general, and administrative expense fell by 40 basis points, as a percentage of sales. In addition, the company is devoting a significant portion of the funds received from its divestments, for share repurchases. P&G expects to return about $15 billion to shareholders this year, in share repurchases. Another long-term growth catalyst for P&G is in the emerging markets, where it has a distinct advantage over many of its peers. Clorox has a relatively small international segment, which represents approximately 17% of its total sales. By contrast, P&G generates more than half of its sales from outside North America.

Source: P&G Fact Sheet, page 1

P&G’s international exposure has actually held it back this year, because of the strong U.S. dollar. Unfavorable currency exchange reduces the value of product sales generated overseas. However, international markets—particularly emerging markets like China and India—offer very attractive long-term growth potential. These are nations with large populations of consumers, and high economic growth. Sales growth in the developing markets rose more than 4% for P&G, over the first three quarters of the fiscal year.

Valuation & Expected Total Returns

In addition to its stronger growth potential, P&G stock trades at a noticeable discount to Clorox. Clorox expects earnings-per-share of $5.25-$5.35 for the soon-to-be-completed fiscal year. This means the stock trades for a price-to-earnings ratio of 25, based on the midpoint of guidance. This is about on par with the S&P 500 Index. As a result, Clorox seems fairly valued. Meanwhile, P&G expects fiscal 2017 core earnings-per-share to increase in the mid-single digits from fiscal 2016, when it had earnings-per-share of $3.67. If P&G generates 4%-6% growth this year, it would have earnings-per-share of approximately $3.82-$3.89. Based on this, shares trade for a price-to-earnings ratio of 22, which means it is has a more attractive valuation than Clorox. P&G could be the better value going forward. Thanks to its cost cuts, share repurchases, and exposure to emerging markets, P&G’s earnings could grow at a higher rate, if its turnaround is successful. This would tilt the expected return from these two stocks, in P&G’s favor. A breakdown of P&G’s potential annual returns is as follows:

• 3%-5% revenue growth
• 1% margin expansion
• 3% share repurchases
• 3.2% dividend yield

Under this scenario, P&G would generate total returns of approximately 9%-12%. Clorox is also likely to grow sales at a 3%-5% annual rate, which is the company’s expectation as part of its “2020 Strategy”. However, it will not benefit as much from cost cuts and share repurchases. Clorox maintains a much less aggressive strategy for margin expansion. And, Clorox repurchased only $254 million of its own stock in fiscal 2016, down from $434 million in fiscal 2015. Total expected returns from Clorox could be as follows:

• 3%-5% revenue growth
• 0.25%-0.5% margin expansion
• 1% share repurchases
• 2.5% dividend yield

Overall annual returns are likely to be in a range of approximately 7%-9% per year for Clorox, going forward. This shows the value of P&G’s major divestment and restructuring. By letting go of brands that were weighing it down, and by significantly reducing costs, earnings growth could be stronger moving forward. And, since P&G stock has a lower valuation, it could see more significant expansion of its valuation multiple than Clorox.

Dividend Yield

Lastly, P&G holds an advantage over Clorox, when it comes to dividend yield. Clorox recently increased its dividend by 5%. The new annualized dividend rate rises to $3.36 per share. Based on the share price, Clorox has a 2.52% dividend yield. This is slightly above average—the S&P 500 Index has an average dividend yield of 2%. P&G also recently increased its dividend, by 3%. Its new dividend is $2.76 per share, which is a yield of 3.17%. While Clorox held a slight edge in terms of dividend growth this year, P&G offers higher significantly current dividend income. With a yield advantage of approximately 70 basis points, P&G stock offers roughly 25% more dividend income than does Clorox. P&G’s dividend growth was slightly below Clorox’s for 2017, but this is largely because P&G is still working through its portfolio restructuring. Going forward, there is a good chance P&G could return to higher dividend growth, as its dividend growth accelerates.

Final Thoughts

Both Clorox and P&G are high-quality stocks. They each have strong product portfolios, and leadership positions in their industries. Clorox stock has enjoyed a much bigger rally over the past several years. This has created substantial wealth for existing shareholders, but it makes the stock less attractive now, relative to P&G. Due to P&G’s growth potential, lower valuation, and higher dividend yield, it looks like a better dividend stock to buy than Clorox at this time.