Don't Race Out To Buy Kimberly-Clark Corporation (NYSE:KMB) Just Because It's Going Ex-Dividend
It looks like Kimberly-Clark Corporation (NYSE:KMB) is about to go ex-dividend in the next 3 days. You will need to purchase shares before the 5th of September to receive the dividend, which will be paid on the 2nd of October.
Kimberly-Clark's next dividend payment will be US$1.03 per share, on the back of last year when the company paid a total of US$4.12 to shareholders. Calculating the last year's worth of payments shows that Kimberly-Clark has a trailing yield of 2.9% on the current share price of $141.11. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether Kimberly-Clark can afford its dividend, and if the dividend could grow.
See our latest analysis for Kimberly-Clark
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. It paid out 78% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. We'd be concerned if earnings began to decline. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. The company paid out 95% of its free cash flow over the last year, which we think is outside the ideal range for most businesses. Cash flows are usually much more volatile than earnings, so this could be a temporary effect - but we'd generally want look more closely here.
Kimberly-Clark paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough cash to cover the dividend. Were this to happen repeatedly, this would be a risk to Kimberly-Clark's ability to maintain its dividend.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Companies that aren't growing their earnings can still be valuable, but it is even more important to assess the sustainability of the dividend if it looks like the company will struggle to grow. If earnings fall far enough, the company could be forced to cut its dividend. With that in mind, we're not enthused to see that Kimberly-Clark's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share. Earnings have been growing somewhat, but we're concerned dividend payments consumed most of the company's cash flow over the past year.
The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, Kimberly-Clark has lifted its dividend by approximately 5.9% a year on average.
The Bottom Line
Is Kimberly-Clark worth buying for its dividend? In addition to earnings being flat, Kimberly-Clark is paying out a reasonable percentage of its earnings as profits. However, the dividend was not well covered by free cash flow. It's not that we think Kimberly-Clark is a bad company, but these characteristics don't generally lead to outstanding dividend performance.
Wondering what the future holds for Kimberly-Clark? See what the 15 analysts we track are forecasting, with this visualisation of its historical and future estimated earnings and cash flow
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
