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Dividend Aristocrats Part 39: Kimberly Clark Corp (KMB)

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Dividend Aristocrats Part 39: Kimberly Clark Corp (KMB) by Ben Reynolds, Sure Dividend
Kimberly Clark’s (KMB) average stock price standard deviation over the last decade is 17.3%. Only 5 stocks with 25+ years of dividend payments without a reduction have a lower standard deviation in the same time period:

  • General Mills (GIS)
  • Southern Company (SO)
  • Johnson & Johnson (JNJ)
  • Consolidated Edison (ED)
  • Harleysville Savings (HARL)

What does this mean?

Kimberly Clark’s extremely low stock price standard deviation is a proxy for just how little risk the company’s business model has.

Kimberly Clark has 5 brands that generate $1 billion+ a year in revenues:

  • Kotex
  • Scotts
  • Kleenex
  • Huggies
  • Pull-Ups

Kimberly Clark’s reach spans the world. Approximately 25% of the world’s population uses Kimberly Clark products.   The company sells its products in over 175 countries and has grown to a market cap of over $46 billion.

Kimberly Clark’s Dividend History

Kimberly Clark’s management is proud of its dividend history (and they should be). Here’s a quote from the company’s most recent dividend announcement:

“2015 marks the 43rd consecutive year that Kimberly Clark has increased its dividend and the 81st straight year it has paid a dividend to shareholders.”

Kimberly Clark’s long dividend history easily makes the company a Dividend Aristocrat. In 2023 (if dividends continue increasing as they very likely will), the company will become a Dividend King.

The company’s dividend history since 1984 is shown graphically below:

Kimberly Clark

In the next section, we will take a closer look at Kimberly Clark’s business segments.

Segment Overview

Kimberly Clark operates in three primary segments. Each segment’s percentage of total operating profit contributed through the first 9 months of fiscal 2015 is shown below to give an idea of the relative size of each segment:

  • Personal Care: 53% of operating profits
  • Consumer Tissue: 31% of operating profits
  • K-C Professional: 16% of operating profits

The Personal Care segment is Kimberly Clark’s largest. The segment manufactures and sells diapers and feminine care segments.  It claims 3 of the company’s 5 billion dollar brands:  Huggies, Pull-Ups, and Kotex.

The Consumer Tissue segment is Kimberly Clark’s second largest.  It controls arguably the company’s strongest brand in Kleenex, as well as the Viva, Scott, and Cottonelle brands.

The K-C Professional segment is Kimberly Clark’s smallest based on both revenue and operating profit.  The segment sells both general and cleaning supplies to businesses around the world.

Kimberly Clark’s Competitive Advantage

Kimberly Clark’s competitive advantage comes primarily from its well-known brand names which it uses to charge premium prices for its products.

The company supports its well-known brands with large advertising expenditures. In fiscal 2014, Kimberly Clark spent $767 million on advertising.

Kimberly Clark sells products in slow changing industries. How much has Kleenex changed over the last few decades? There is not much you can do to improve upon tissues, paper towels, or toilet paper. I find it very difficult to imagine a ‘disruptive technology’ in the tissue business.

The glacially slow rate of change in Kimberly Clark’s market segments give it staying power. Money spent on advertising has a longer ‘shelf life’ than companies in fast changing industries.

Kimberly Clark’s competitive advantage comes from the brand equity built up in its premium-priced products that exist in slow changing industries.

Growth Prospects

Kimberly Clark’s earnings-per-share growth has been anemic over the last 20 years.

The company exists in a slow changing industry, but its brands have slowly been losing ground to generic products and competitors.

The image below shows Kimberly Clark’s earnings-per-share each year since 1999 (including expected full year 2015and expected 2016 numbers):

Kimberly Clark

Kimberly Clark’s depressing expected 2015 numbers are a result of negative currency effects, and restructuring from the company’s spin-off its health care products segment.   The company is expected to return to strong growth in 2016.

Still, Kimberly Clark has not exhibited acceptable earnings-per-share growth over a very long period of time.

The company’s management expects ‘mid to high single digit earnings-per-share’ growth going forward – this gives a range of 4% to 9% earnings-per-share growth a year. The company’s management is (optimistically) expecting revenue to grow at 3% to 5% a year.

I believe Kimberly Clark will see somewhat better results over the next 10 years than the previous 10 years. The company is focusing on efficiency and its core brands.

I expect earnings-per-share growth to be in the 4% to 7% range over the next several years; management’s top-end growth numbers seem too optimistic.

This growth combined with the company’s current 2.8% dividend yield gives investors expected returns of ~7% to 9% a year from Kimberly Clark.

Kimberly Clark’s Puzzling Valuation

As discussed above, Kimberly Clark’s growth prospects are not great. Despite this, the company trades at a forward price-to-earnings ratio of 25.6. For comparison, the S&P 500 is trading for a forward price-to-earnings ratio of 17.5.

There’s no doubt that Kimberly Clark stock scores high marks for safety with investors. At the same time, the company’s recent growth history leaves much to be desired.

As a result, I believe Kimberly Clark to be overvalued at current prices. Investors should wait until this company’s price-to-earnings ratio falls below 18 before considering adding or initiating a position in the stock.

Recession Performance

Kimberly Clark performed well through the Great recession of 2007 to 2009.  The company’s earnings-per-share through the Great Recession are shown below:

  • 2007 earnings-per-share of $4.25
  • 2008 earnings-per-share of $4.06
  • 2009 earnings-per-share of $4.52
  • 2010 earnings-per-share of $4.45

The company’s recession resistance only adds to its appeal as a ‘safety stock’.

Final Thoughts

Kimberly Clark is a high quality business trading with a strong competitive advantage – that has weakened a bit over the last decade.  Despite this, Kimberly Clark is still the most dominant player in many of the consumer product categories it serves.

The company offers shareholders 7% to 9% total returns per year going forward, with very low volatility. This combination would be appealing if it weren’t for the company’s rich valuation.

The company’s high valuation gives it a below-average rank using The 8 Rules of Dividend Investing. Kimberly Clark is a hold at current prices, but is not a buy at this time. When the company’s valuation multiples decline it will make a more compelling investment.

Dividend Aristocrats Part 39: Kimberly Clark Corp (KMB) by Ben Reynolds, Sure Dividend

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