Kimberly-Clark: Strong Brands Pay Dividends for This Dividend Aristocrat
Kimberly-Clark Corp. (NYSE:KMB) is a global consumer products company that operates in 175 countries. It produces disposable consumer goods, such as 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).
Warning! GuruFocus has detected 6 Warning Sign with KMB. Click here to check it out.
billion-dollar brands that have resulted in steady long-term growth in profits and dividends. The stock has stood out for its ability to deliver reliable returns for long-term investors. Kimberly-Clark has increased its dividend for 48 consecutive years, making it a member of the Dividend Aristocrats.
Kimberly-Clark has a strong business model, leading brands and impressive dividend growth potential.
Business overview
Kimberly-Clark generates more than $18 billion in annual sales, making it one of the largest U.S. consumer staples companies. The company trades with a market capitalization of around $48 billion. It has consistently proven its recession-proof qualities, having withstood multiple market adversities throughout the past several decades.
If there is one thing that characterizes the company's performance, it is consistency. By successfully managing its brands and benefiting from the pricing power that such big manufacturers enjoy, the company has achieved a 10-year average earnings per share growth rate of 4.4%. Having a relatively low payout ratio has also allowed management to accelerate shareholder returns. As a result, dividends have grown at a 10-year compound annual growth rate of 5.4%. Not only are these increases inflation-beating, which allows for real income appreciation, but the payout ratio still remains relatively low at close to 60%.
Management has further room to easily grow the dividends, even in an adverse economic scenario with temporarily reduced earnings, while still retaining earnings for future acquisitions and share buybacks. Regarding share buybacks, management has been consistently repurchasing stock as an additional means of returning shareholder capital. Over the past 20 years, the company has reduced its share count by a whopping 37%. Its financial resiliency and commitment to shareholders can be witnessed through the years, as buybacks have never taken a pause.
In fact, during the last financial crisis, management actually accelerated them to take advantage of the stock's temporarily reduced price. Few companies were able to withstand the last financial crisis so well. In fact, most were forced to issue more shares instead of repurchasing them.
Going forward, we expect both earnings and dividends per share to continue growing at their usual rate, around 4%. Kimberly-Clark's figures may not be the most exciting in terms of growth, but the stock offers reliability, which allows investors to sleep well at night, and regular dividend increases each year.
Valuation and dividend analysis
Kimberly-Clark's shares are currently trading at a price-earnings ratio of around 21, which presents a slight premium to the company's historical average between 15 and 18. The forward price-earnings ratio is close to 19.5, as the company is expected to grow its earnings per share. While we believe the stock is a quality pick, a slight valuation contraction toward its average may somewhat reduce future shareholder returns.
Overall, we believe that Kimberly-Clark, along with the consumer staples sector in general, is attractively priced. The company trades at a valuation multiple close to that of its peers. Examples include:
The Procter & Gamble Co. (NYSE:PG).with a forward price-earnings ratio of 23.
PepsiCo Inc. (NASDAQ:PEP) with a price-earnings ratio of 26.
The Coca-Cola Co. (NYSE:KO) with a price-earnings ratio of 20.
Mondelez International Inc. (NASDAQ:MDLZ) with a price-earnings ratio of 21.
Colgate-Palmolive Co. (NYSE:CL) with a price-earnings ratio of 25.
Based on our prudent earnings per share and dividends per share growth projections, we expect investors to enjoy medium-term compounded annual growth rate returns of around 5% to 6%. Around half of these returns are to be delivered from the company's robust and stable dividend, which currently yields around 3%.
While Kimberly-Clark's business model is largely stable and cash flow predictable, there are still some risks to be considered, as with every other investment.
Potential risk factors
Similar to many other stocks in the market, Kimberly-Clark shares have made a full recovery from the 2020 lows. However, the stock market doesn't always reflect the underlying economy. The likelihood that the coronovirus may have hurt many consumers' purchasing power is yet to be revealed. With many small businesses temporarily closing, the long-term effects on the economy remain to be seen.
Further, as consumers attempt to save more money during such adverse times, the company faces increased competition from cheaper brands. In order to make for an attractive option, Kimberly-Clark may have to reduce its prices and diminish its margins. While we remain confident in the company's long-term growth, such challenges may indeed occur, at least in the short term.
Moreover, amid the coronavirus global shutdown, many supply and operational chains were disrupted. As a result, the prices for raw materials, transportation or other necessary supplies have increased and resulted in reduced operational efficiencies. This could also affect the company's margins and business results, again in the short term.
Finally, operating all over the world, the company's operating results are subject to multiple foreign exchange risks, especially during volatile markets.
Kimberly-Clark: Steady dividend growth stock
Kimberly-Clark has been a long-term compounder, delivering reliable shareholder returns. With 48 years of consecutive dividend increases, it presents one of the most attractive income options for regular income generation. We believe that through the company's iconic brands, the stock's limited but stable growth will continue going forward.
While some risks remain, Kimberly-Clark has pricing power, recurring revenue streams and strong free cash flow generation. The company is likely to grow its earnings per share and dividends for many years going forward. Along with a 3% dividend yield, Kimberly-Clark is an attractive dividend growth stock.
Disclosure: No positions.
Read more here:
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 6 Warning Sign with KMB. Click here to check it out.
This Powerful Chart Made Peter Lynch 29% A Year For 13 Years
How to calculate the intrinsic value of a stock?
