Published by Bob Ciura on November 19th, 2017
The Dividend Aristocrats are a group of 51 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
We review each of the 51 Dividend Aristocrats each year. The next stock in this year’s edition is consumer products giant Kimberly-Clark (KMB).
Kimberly-Clark is one of 350 dividend-paying stocks in the consumer staples sector. You can see all 350 dividend stocks here.
Kimberly-Clark has raised its dividend for 45 consecutive years. It currently has a 3.4% dividend yield, which is well above the 2% average dividend yield of the S&P 500.
This article will discuss Kimberly-Clark’s business model, growth potential, and whether the stock is trading at an attractive valuation right now.
Business Overview
Kimberly-Clark traces its beginnings back to 1872. Four young businessmen, John A. Kimberly, Havilah Babcock, Charles B. Clark, and Frank C. Shattuck, came up with $30,000 of start-up capital to form Kimberly, Clark and Co.
Today, Kimberly-Clark is a global consumer products giant that operates in 175 countries. It manufactures a wide range of products, including paper towels, diapers, tissues, and more. It has three business segments:
- Personal Care (50% of sales)
- Consumer Tissue (32% of sales)
- K-C Professional (18% of sales)
Kimberly-Clark’s Personal Care segment includes the Huggies, Pull-Ups, Kotex, Depend, and Poise brands. This is the company’s largest business segment.
Source: Barclays Global Consumer Staples Conference, page 20
The Consumer Tissue segment includes Kleenex, Scott, Cottonelle, and Viva. Lastly, K-C Professional services to businesses and workplaces.
Kimberly-Clark’s strong brands provide the company with profitability and steady growth. Organic sales increased 2% in 2016. Adjusted earnings-per-share increased 5% for the year, to $6.03.
Going forward, the company is targeting new geographic markets, and a push toward greater efficiency, to drive earnings growth.
Growth Prospects
Kimberly-Clark has positive growth prospects moving forward. One particularly attractive area of growth is the emerging markets, such as China. These are regions of the world with large populations, and high economic growth, which makes them very attractive for global consumer products companies.
Organic revenue in the developing and emerging markets rose 14% compounded annually, from 2013 to 2015. Growth has slowed recently, but the company is still seeing growth in both sales and volumes.
Source: Barclays Global Consumer Staples Conference, page 8
Developing and emerging markets now represent 29% of annual revenue. Kimberly-Clark has taken a leadership position across many of its core product categories. For example, volume shipments of diapers rose 26% in China, and 10% in Eastern Europe last year.
Cost cuts are another important part of the company’s earnings growth plan. Several years ago, Kimberly-Clark instituted a company-wide cost-cutting program called FORCE, which stands for Focus On Reducing Costs Everywhere.
Source: Barclays Global Consumer Staples Conference, page 8
FORCE has delivered $3.3 billion of cost reductions over the past 13 years, and the company is still generating significant margin improvement from FORCE.
Kimberly-Clark realized $435 million in FORCE-related cost savings last year. This helped company-wide gross margin expand by 70 basis points in 2016. It also expects another $425 million to $450 million in cost savings for 2017.
Thanks largely to growth in new geographic markets and cost cuts, Kimberly-Clark expects earnings-per-share of $6.20 to $6.35 for 2017. This would represent 2.5% to 5% earnings growth for the full year.
Competitive Advantages & Recession Performance
Kimberly-Clark’s most important competitive advantages are its brands and global scale. The company enjoys a leadership position across its brand portfolio.
It retains its competitive advantages through marketing and innovation. Kimberly-Clark spends over $1 billion each year on advertising and research and development. This allows the company to stay ahead of the competition.
In addition, Kimberly-Clark’s global reach provides the company with the efficiency to keep costs low. The FORCE program is an example of its ability to keep costs steady, even as revenue grows.
Kimberly-Clark remains highly profitable, even during recessions. For example, it performed well through the Great recession of 2007-2009. Its earnings-per-share through the Great Recession are shown below:
- 2007 earnings-per-share of $4.25
- 2008 earnings-per-share of $4.06 (4.5% decline)
- 2009 earnings-per-share of $4.52 (11% increase)
- 2010 earnings-per-share of $4.45 (1.5% decline)
As you can see, while Kimberly-Clark did see earnings decline in 2008 and 2010, it also registered a double-digit growth rate in 2009. The reason for its strong performance over the course of the recession, is that the company has a stable business model.
Consumers will always need personal care products, regardless of the condition of the economy. This gives Kimberly-Clark a certain level of product demand each year, even during recessions.
Valuation & Expected Returns
Based on adjusted earnings-per-share of $6.27 at the midpoint of 2017 guidance, Kimberly-Clark trades for a price-to-earnings ratio of 18.2. It seems to be trading below its 10-year average price-to-earnings ratio, of 20.1.
Source: Value Line
However, in 2015 Kimberly-Clark traded for an abnormally-high price-to-earnings ratio of 40.6. This was because the company took a number of non-recurring items, which reduced GAAP earnings-per-share.
Excluding the distortion of 2015, Kimberly-Clark’s 10-year average price-to-earnings ratio is 17.8, which means the stock is actually trading above its average valuation.
As a result, Kimberly-Clark appears to be fairly valued, and perhaps slightly overvalued. Going forward, investors cannot rely on expansion of the price-to-earnings ratio, to fuel future returns.
Instead, future returns will most likely be generated from earnings growth and dividends. Given the company’s strong brands and growth catalysts, average annual earnings growth in the mid-single digits is a reasonable set of expectations.
Therefore, a potential breakdown of future returns is as follows:
- 2% to 3% organic revenue growth
- 0.25% to 0.5% margin expansion
- 2% share repurchases
- 3.5% dividend yield
In this scenario, total shareholder returns would reach approximately 7% to 9% per year, including dividends.
Final Thoughts
Kimberly-Clark is a high-quality company, with a diverse portfolio of strong brands. It has positive growth prospects moving forward. And, it is a reliable dividend stock.
Kimberly-Clark has been in operation for more than 100 years, and currently has a dividend yield above 3%. It meets our definition of a blue-chip stock. We have compiled a list of stocks with these two qualities.
You can see the full list of blue chip stocks here.
The only problem with Kimberly-Clark right now is its valuation, which appears to be slightly on the high side. As a result, investors might want to wait for a decline in the share price before buying. However, if Kimberly-Clark traded at or below its average valuation, it would be an attractive buy.
