Better Buy: Procter & Gamble Co vs. Kimberly Clark Corp

Amongst the retired, it's a topic of discussion as old and heated as politics and religion: What are the very best dividend stocks to invest in?

Ok, maybe it's not that hot of a topic. But for those who wish to preserve and grow their nest eggs -- safely -- dividend-paying stocks play a crucial role. Two stalwarts worth considering are home-goods giant Procter & Gamble (PG 0.32%) and all-things-paper specialist Kimberly-Clark (KMB -0.10%).

Below, I'll walk you through three different lenses to evaluate these two companies and help determine which is a better buy at today's prices.

Financial fortitude

Hard times can really tell you a lot about a company. If it has lots of cash on hand, a recession can actually be a good thing: A company can buy back stock, out-spend its cash-strapped rivals, and even acquire them...if the price is right.

Debt, on the other hand, does just the opposite: It forces companies to narrow the scope of what they offer, cut back on reinvestment in their business, and even be forced into bankruptcy.

That's why the financial fortitude of the underlying company you own is so important. Here's how P&G and Kimberly-Clark stack up on a few key metrics.

FCF = free cash flow. Net income and FCF are on trailing-12-month basis. Data source: Yahoo! Finance.

When comparing these figures, it's worth noting that P&G is valued at roughly five times the size of Kimberly-Clark. But even that doesn't help explain the divergence in figures between these two.

While both of these companies sport pretty high debt levels, P&G's looks much more reasonable than Kimberly-Clark's, relative to the amount of cash on hand, and the levels of free cash flow coming through.

While neither company could go on a spending spree if a recession hit, P&G is clearly in a better position to endure a recession than Kimberly-Clark.

Winner = Procter & Gamble

Valuation

This can be a tricky metric to encapsulate. There are lots of ways to measure the "value" of a stock. Below, I've included four metrics I always check before making a buy or sell decision.

Non-GAAP measures used for P/E. Data sources: Yahoo! Finance, E*Trade.

Usually, I favor the price to free cash flow ratio over price to earnings because there are fewer accounting gimmicks that can change free cash flow. On that basis, P&G looks like it's clearly the cheaper company -- trading at an almost 30% discount to Kimberly-Clark.

But P&G's PEG ratio -- which takes a company's growth rate into account -- is actually higher. In other words, analysts generally believe Kimberly-Clark will grow faster moving forward than P&G -- thus they are willing to pay a higher premium for it.

Usually, I'd settle this by calling it a tie, but with these stocks, there's an extra factor to consider: dividends.

Data source: Yahoo! Finance.

If you're already a shareholder of either company, there's good news: Both offer substantial yields, and both have fairly safe dividends. FCF is what dividends are paid out of, and neither company needed to use more than 70% of FCF to pay back shareholders. That means the dividends are likely safe from a cut and -- given continually improving business -- have room for future growth.

But since P&G offers both a higher yield, and uses less of its FCF to pay out that yield, I'm giving the nod to P&G here.

Winner = Procter & Gamble

Sustainable competitive advantage

In my years as an investor, nothing has played a bigger role in the success/failure of an investment than the sustainable competitive advantage of the underlying businesses. Both of these companies take the same approach to their advantages: They have the most powerful brand names in their respective categories.

P&G owns many of the products you use in your household. Many generate over $1 bilion in sales per year, including Gilette, Bounty, Duracell, Head & Shoulders, Pampers, and Pringles.

Kimberly-Clark has a more focused product line, some of which compete against P&G. The most popular include: Scott paper towels, Kleenex, Huggies, Cottonelle, and Kotex.

It's pretty hard to delineate an obvious winner between these two since their advantages are almost identical: being able to charge a slight premium for the most widely recognized and trusted names in their respective fields.

Winner = Tie

At the end of the day, P&G simply has a healthier balance sheet and a more attractive dividend than Kimberly-Clark. That's not to say Kimberly-Clark stock is doomed to underperform over the coming years, just that -- based on the information available right now -- P&G seems like the more obvious choice.