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Are The Procter & Gamble Company (PG) or Johnson & Johnson (JNJ) Good Stocks to Buy?

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Despite the fact that it is a consumer staple stock (with a beta of 0.3), The Procter & Gamble Company (NYSE:PG) has outperformed the S&P 500 over the last year with the stock price rising by 16%. In the second quarter of the personal product company’s fiscal year (the quarter which ended in December 2012), it experienced only a 2% increase in sales compared to the same period in the previous fiscal year, though this was an improvement from the Q1 results. Operating margins expanded a bit for the quarter, resulting in a 6% increase in operating income after adding back some impairment charges to last year’s numbers.

Cash flow from operations was up in the first six months of the fiscal year, to $6.6 billion; the company increased short-term debt in order to invest, reduce long term debt by over $1 billion, and return over $7 billion in cash to shareholders. The Procter & Gamble Company (NYSE:PG) also pays a dividend yield close to 3%, and combined with the low sensitivity to economic conditions it could be a good choice for a defensive portfolio. At 18 times earnings Procter & Gamble looks a bit pricy, though the company has been buying back shares in addition to paying dividends and we did see its operating income grow at last somewhat in its most recent quarterly report.

Warren Buffett

We track quarterly 13F filings from hedge funds and other notable investors as part of our work researching investment strategies (for example, the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year), and so we can also see which funds liked The Procter & Gamble Company (NYSE:PG) as of the end of December. Warren Buffett’s Berkshire Hathaway had Procter & Gamble as one of its top stock picks at a position of almost 53 million shares (see Buffett’s stock picks). Billionaire Bill Ackman’s Pershing Square also had the company as one of its favorite stocks, with almost 28 million shares in its own portfolio (find Ackman’s favorite stocks).

The Procter & Gamble Company (NYSE:PG)’s peers include Johnson & Johnson (NYSE:JNJ) and Colgate-Palmolive Company (NYSE:CL). These two stocks each trade at a small premium to Procter & Gamble in terms of trailing earnings, with P/Es in the 21-23 range. However, superior growth rates are supposed to pull each at least even on a forward basis. We’re not sure how strong the basis for that thesis is in the case of Colgate-Palmolive: in its most recent quarter revenue was up only 3% compared to the same period in the previous year, essentially in line with how well P&G did. Johnson & Johnson (NYSE:JNJ) did outperform in terms of the top line, with revenue numbers coming in 8% higher, so perhaps it does merit its premium. That company is also competitive with The Procter & Gamble Company (NYSE:PG) in terms of paying a dividend of about 3%.

We can also compare Procter & Gamble to personal products companies, including Kimberly Clark Corp (NYSE:KMB) and Estee Lauder Companies Inc (NYSE:EL). These stocks also look expensive in terms of their trailing earnings, with P/E multiples above 20. Estee Lauder actually trades at 22 times forward earnings estimates, and even though that company has been experiencing decent growth numbers we would avoid buying as the stock price seems to have baked in considerably better performance. Kimberly-Clark actually looks like an excellent defensive stock with a beta of 0.0 and a dividend yield of 3.2%. However, from a value perspective the stock looks less attractive with fairly low revenue growth in the fourth quarter of 2012 versus a year earlier, an actual decline in net income, and the fact that it too is valued at a premium to Procter & Gamble.

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