Inflation vs. Dividends in Consumer Staples, Dividends Win All Day (KMB, PG, CL, CLX, CHD, XLY)

It would be easy to say that inflationary pressures are impacting consumer staples and consumer discretionary stocks.  This sector remains one of our favorites for investors who want defensive protection and high income via dividends.  The fresh earnings reports from Kimberly-Clark Corporation (NYSE: KMB), Procter & Gamble Co. (NYSE: PG), and Colgate-Palmolive Co. (NYSE: CL) all show that pricing pressure is there.  This will foreshadow the results for Colgate-Palmolive Co. (NYSE: CL) and even for Church & Dwight Co. Inc. (NYSE: CHD)  

Pressures may keep building on the cost front and Joe Public may have to pony up more money for daily goods, but there is some real evidence out there that inflation may not really hurt these companies.  That is good news for investors, particularly for those who want dividends and who want to see gains from defensive stocks.  A great video from Mike Tarsala of Thomson Reuters puts up some great evidence showing how the inflationary pressure may actually skip these stocks with some great charts and graphs to overlay against the current trends.

That video shows some interpretation as well in the Consumer Discretionary Select Sector SPDR (NYSE: XLY) ETF, which tracks more of the discretionary spending companies.  The logic may sound like common sense, but investors need to know that there are cost cutting tricks for these companies.  More importantly, companies have been telegraphing for weeks now that they are going to have to start passing on higher costs to consumers.  Even Wal-Mart Stores Inc. (NYSE: WMT) has issued some light warnings.

We have done some work of our own in recent days, weeks, and months, and it is easy to see what is coming in this sector.  For starters, Kimberly-Clark Corporation (NYSE: KMB) remains our own sector pick as a stock to own for the next decade.  Most of the defensive plays in the consumer staples shares offer what we look for, but Kimberly-Clark is the cheapest and seems to continue on its shareholder-reward path.

It was just last week that we showed how the P&G dividend hike would likely keep pressure up on peers to keep raising dividends.  There is no change in that stance, not even by an inch. If companies can keep raising dividends, the translation is that income will either hold up or will keep growing. 

Procter & Gamble’s report this morning came in at $0.96 EPS, a penny shy of the Thomson Reuters consensus of $0.97.  Revenues were up about 5.5% at $20.23 billion versus $20.3 billion expected.  Guidance for the current quarter was given at $0.80 to $0.85 EPS, a bit shy of the $0.85 estimate. Where you can see some expected pricing power is that P&G gave revenue guidance of $20.4 to $20.79 billion against street estimates of $20.39 billion.  For all of 2011, P&G sees $3.91 to $3.96 EPS on revenues of $81.5 to $82.8 billion against Thomson Reuters estimates of $3.96 EPS and $82.17 billion in sales. 

Colgate-Palmolive (NYSE: CL) reported earnings this morning of $1.16 EPS and sales grew 4.3% to $3.99 billion.  Thomson Reuters had estimates of $1.16 EPS and $3.91 billion in revenues.  INput prices, in-store promotions, and other pressures were cited as challenges for the company ahead. 

Procter & Gamble Co. (NYSE: PG) was down more at the open and in pre-market, but shares are down only $0.03 right now at $63.99 versus a low of $62.93 this morning and versus a 52-week high of $66.95.  Colgate-Palmolive Co. (NYSE: CL) is now up 0.25% at $81.28 and its 52-week range is $73.12 to $85.82.

Kimberly-Clark Corporation (NYSE: KMB) is also up this morning by about 0.2% at $65.11 and it has a 52-week trading range of $59.57 to $67.24.  Keep in mind that its shares fell from $66 to $64 from its earnings report.  Input prices and promotion expenses were cited as pressures.

There is an obvious issue here taking place.  Inflation is here.  It might not matter for these consumer staples stocks.  We have to use these consumer products.  Maybe you can trade down a bit, or maybe you’ll just pay 2% more without thinking about it.  If these stocks were truly at-risk of having severe earnings issues, ask yourself why the shares are not getting hammered down harder.  The market aims to act as a discounting mechanism.  The market is signaling that either these price pressures will abate soon or that the companies will get to pass on their pricing pressures.  Our only massive concern remains the cost of the in-store promotion spending that these companies are all fighting each other with.

P&G pays out close to 3.1% now after its hike, Colgate-Palmolive pays a dividend yield of about 2.9%, Kimberly-Clark pays closer to 4.3% now, and Clorox pays closer to 3.2% in a dividend yield.  Church & Dwight Co. Inc. (NYSE: CHD) did double its payout recently, but it still really lags the group with a dividend yield of about 1.7%.

You can see where this is going. There is just no reason to panic over the future of the consumer products companies.  Dividend investors have history on their side for both income and defensive shares.

JON C. OGG