Dividend Kings In Focus: Kimberly-Clark

Kimberly-Clark (KMB) recently increased its dividend for the 50th consecutive years. As a result, it has joined the list of Dividend Kings.

The Dividend Kings are a group of just 39 stocks that have increased their dividends for at least 50 years in a row.

Kimberly-Clark is a global leader in its industry and should continue to grow its dividend each year, even during recessions.

This article will discuss the company’s business overview, growth prospects, competitive advantages, and expected returns.

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 company that operates in 175 countries and sells disposable consumer goods, including paper towels, diapers, and tissues.

It operates through two segments that each house many popular brands: Personal Care Segment (Huggies, Pull-Ups, Kotex, Depend, Poise) and the Consumer Tissue segment (Kleenex, Scott, Cottonelle, and Viva), generating ~$19 billion in annual revenue.

Source: Investor Presentation

Kimberly–Clark reported fourth quarter and full-year earnings on January 26th, 2022, and results were better than
expected on both the top and bottom lines. Earnings–per–share came to $1.30 on an adjusted basis, which was a nickel better than expected.

Total revenue was $4.97 billion, which was up 2.7% from the year-ago period and was $70 million better than estimates. Organic sales growth came to 3%, with the balance coming from the net impact of acquisitions and divestitures.

Full-year adjusted earnings came to $6.18, which was down sharply from 2020. However, 2020 results were driven by extraordinary demand from the pandemic, which made for a difficult comparison. Management guided for net sales gains of 1 to 2 percent, which includes organic sales growth of 3 to 4 percent, and we expect earnings to come to $6.05 for this year.

Growth Prospects

Kimberly-Clark has committed to elevating its core brands as one of the three pillars of growth in the coming years. It will do this by launching different product innovations via extensions of existing lines and entirely new products. The company will also continue to manage its revenue via pricing and mix as well as promotional strategies.

Finally, it will use its significant marketing expertise to go after under-penetrated categories to drive market share gains and ultimately, higher revenue and profit.

The second growth pillar is accelerating growth in its developing and emerging (D&E) markets, which make up a significant portion of the company’s sales. The company will focus on its personal care and professional segments in particular, with its largest opportunities coming from places where it has low category penetration and frequency of usage.

Source: Investor Presentation

The company’s focus for D&E development is Latin America and China in particular, with smaller markets seeing a meaningful push as well. Kimberly-Clark plans to use its significant supply chain and marketing experience to pursue growth in areas where it under-performs today, and that should help drive some incremental growth.

Kimberly-Clark also continues to pursue cost savings. It has managed to grow its earnings–per–share thanks to share repurchases and its cost reduction programs. With operating margins rising steadily over time, increasing profitability is working to offset somewhat weak revenue numbers. Kimberly–Clark’s management team has extended this initiative to 2022, aiming for another $1.5 billion of cumulative savings over the three–year period.

Overall, we expect 5% annual EPS growth over the next five years.

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 and indeed, across the world.

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. Given its commitment to its growth pillars, we expect this will only increase over time.

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 manage costs, even as revenue grows, and has seen years of success in reducing operating costs.

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 sells products that consumers need regardless of economic conditions.

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 $6.05 at the midpoint of 2021 guidance, Kimberly-Clark trades for a price-to-earnings ratio of 21.6.

Excluding outlier years, Kimberly-Clark has traded at an average price-to-earnings ratio of ~18 over the last decade. This is also our estimate of fair value for the stock. The valuation has moderated somewhat of late, but shares still trade in excess of our estimate of fair value.

If the stock valuation declines to 18 over the next five years, it would reduce annual returns by 3.6% per year. In addition, future returns will be generated from earnings growth and dividends. Given the company’s strong brands and growth catalysts, average annual earnings growth of 5% is a reasonable expectation. The stock also has a 3.5% dividend yield. In total, we see annual returns of 4.9% over the next five years.

Given the strong yield, 50-year history of dividend increases, and moderate growth expectations, we rate the stock a hold for dividend growth investors. But the stock is not a buy for new investment right now due to the high valuation.

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 an extremely reliable dividend stock. Future earnings growth will be highlighted by emerging markets, cost reductions, and share repurchases.

Kimberly-Clark has increased its dividend for 49 years in a row, and currently has a dividend yield of 3.5%. It, therefore, meets our definition of a blue-chip stock, and it should continue to deliver steady dividend increases each year.

Disclaimer: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities. However, the publishers of Sure ...

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