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This article was originally published on Simply Wall St News
Today, we are going to analyze the Kimberly-Clark Corporation (NYSE:KMB) from the lens of a dividend investor. We are looking for a stable, essential product, with a history of dividend payments and a positive outlook. Keep in mind that dividend investors can sometimes make the mistake of chasing high yields and end up losing their dividend returns on the depreciation of the price, so we need to make sure that the company has solid future potential.
Before we begin, here is a brief reminder of the recent earnings and a general overview:
Kimberly-Clark reported a solid third quarter result with improved revenues, although earnings and profit margins were flat:
Revenue: US$5.01b (up 7.0% from 3Q 2020)
Net income: US$469.0m (flat on 3Q 2020)
Profit margin: 9.4% (in line with 3Q 2020)
The company has strong fundamentals indicating a high return on capital employed (ROCE) at 29%. This means that the company is run efficiently by management and that the return on projects, vastly surpasses the costs of capital, putting the company in a value creating position for investors.
A company in decline can be a risky proposition for dividend investors. That's why it is great to see that Kimberly-Clark is stable, with an expectation to grow revenue by 2.7% and earnings by 8% annually.
This brings us to the final step in the overview - the valuation. According to the Simply Wall St Free Cash Flow to Equity model, Kimberly-Clark is some 40% undervalued. Which means that the stock has great upside potential, along with the returns from dividends.
Kimberly-Clark Dividend Analysis
With Kimberly-Clark yielding 3.5% and having paid a dividend for over 10 years, many investors likely find the company quite interesting. We'd guess that plenty of investors have purchased it for the income, as the company has provided a solid 34% total return for the last 5 years and a 14% return from price increase, which means that dividends accounted for 20% of the returns.
The company also bought back stock during the year, equivalent to approximately 1.3% of the company's market capitalization at the time.
The chart below shows a complete historical picture of the increases in dividends, as well as the resulting dividend yields.
Companies (usually) pay dividends out of their earnings, and that is why we investigate whether a company can afford its dividend, measured as a percentage of a company's net income after tax.
Kimberly-Clark paid out 76% of its profit as dividends, over the trailing twelve-month period. Since it's paying out most of its earnings, we are not looking forward to increases in dividends per share, but can safely expect the company to be able to fulfill the dividend commitments.
Another important check we do is to see if the free cash flow generated is sufficient to pay the dividend.
Kimberly-Clark paid out 100% of its free cash last year. Cash flows can be lumpy, but this dividend was not well covered by cash flow. Kimberly-Clark paid out less in dividends than it reported in profits, but unfortunately it didn't generate enough free cash flow to cover the dividend. Were it to repeatedly pay dividends that were not well covered by cash flow, this could be a risk to Kimberly-Clark's ability to maintain its dividend.
We update our data on Kimberly-Clark every 24 hours, so you can always get our latest analysis of its financial health, here.
Dividend Growth Potential
While dividend payments have been relatively reliable, it would also be nice if earnings per share (EPS) were growing, as this is essential to maintaining the dividend's purchasing power over the long term.
Kimberly-Clark's EPS are effectively flat over the past five years. Over the long term, steady earnings per share is a risk as the value of the dividends can be reduced by inflation.
There are exceptions, but limited earnings growth and a high payout ratio can signal that a company is struggling to grow. That's fine as far as it goes, but we're less enthusiastic as this often signals that the dividend is likely to grow slower in the future.
Kimberly-Clark has both a sustainable dividend yield of 3.5% and possibly undervalued cash flows. The company is experiencing a cyclical down-turn because of the baby bust situation during the pandemic, and that is precisely why it can be a great opportunity for investors who are estimating a resurgence in births.
The stock is perhaps most suitable for holding on the long term, as large price action is not expected in the near future, but the quality of operations as evident by the return on capital indicate sustainable future profitability.
Looking for more high-yielding dividend ideas? Try our curated list of dividend stocks with a yield above 3%.
Simply Wall St analyst Goran Damchevski and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.