Is Kimberly-Clark Stock A Better Pick Over Altria?

We believe that Kimberly-Clark stock  (NYSE: KMB) is currently a better pick than the tobacco company, Altria stock (NYSE: MO), given its better valuation. The decision to invest often comes down to finding the best stocks within the scope of certain characteristics that suit an investment style. In this case, although these companies are from different industries, they share a similar revenue base of around $20 billion and both are consumer defensive stocks.

Although Kimberly-Clark has seen a better revenue growth, Altria is more profitable. Also, KMB stock trades at 20x forward expected earnings, versus 10x for Altria. We think this gap in valuation will remain in favor of Kimberly-Clark in the coming years. There is more to the comparison, and in the sections below, we discuss why we think KMB will outperform MO in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation.

1. Altria Stock Has Fared Slightly Better Than Kimberly-Clark In The Last Three Years

KMB stock has shown gains of 20% from levels of $120 in early January 2021 to around $145 now. In comparison, MO stock has shown gains of 25%, while the broader S&P500 has risen 50% over this period. However, the increase in KMB and MO stocks has been far from consistent. Returns for KMB stock were 10% in 2021, -2% in 2022, and -7% in 2023, while that for MO were 16%, -4%, and -12% over these years, respectively. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that KMB and MO underperformed the S&P in 2021 and 2023.

In fact, consistently beating the S&P 500 — in good times and bad — has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

2. Kimberly-Clark’s Revenue Growth Is Better

Kimberly-Clark’s revenue growth has been better, with a 2.2% average annual growth rate in the last three years, compared to -0.5% for Altria.

Altria sells its tobacco products in the U.S. markets. Due to supply disruptions, the company’s revenue growth was impacted during the pandemic. Altria also sold its wine business for $1.2 billion in 2021, with an increased focus on smoking and smokeless products. With higher inflation, the company is seeing a decline in cigarette volume lately, a trend expected to continue going forward. For perspective, the volume of smokable products declined 9.6% y-o-y to 86.4 billion sticks in 2022, and another 9.8% to 76.3 billion sticks in 2023. That said, pricing growth is helping the company offset most of the revenue loss from volume. Altria is also benefiting from its relatively new smoke-free products, including NJOY and on!

For Kimberly-Clark, revenue growth is driven by better price realizations. The company produces primarily paper-based consumer products, manufacturing sanitary paper products and surgical & medical instruments. The Personal Care segment made up around 52% of the company’s sales in 2023, contributing $10.7 billion to total revenue. Although the company is benefiting from pricing gains for its products, the volume growth has been tepid lately.

Looking at the last twelve months, both companies have seen a decline of <1%.  Our Altria Revenue Comparison and Kimberly-Clark Revenue Comparison dashboards provide more insight into the companies’ sales.

3. Altria Is More Profitable But Kimberly-Clark Offers Lower Risk

Altria’s reported operating margin expanded from 52.1% in 2020 to 56% in 2023. In comparison, Kimberly-Clark’s operating margin contracted from 16.9% to 14.7% over this period. Looking at the last twelve-month period, Altria’s operating margin of 56.3% fares much better than 14.6% for the latter.

Looking at financial risk, Kimberly-Clark fares better. While Altria’s 29% debt as a percentage of equity is higher than 16% for Kimberly-Clark, its 5% cash as a percentage of assets is also slightly lower than 7% for the latter. This implies that Kimberly-Clark has a better debt position and more cash cushion.

4. The Net of It All

[1] Returns as of 8/21/2024
[2] Cumulative total returns since the end of 2016

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