Kimberly-Clark (KMB, Financial) manufactures and markets disposable consumer products. The company owns five brands that do over $1 billion per year in sales: Kleenex, Kotex, Huggies, Pull-Ups and Scotts. The company sells its products in over 175 countries and has grown to a market cap of over $42 billion. Approximately 25% of the world’s population uses Kimberly-Clark products. When I last analyzed Kimberly-Clark, the company had just come off strong third-quarter earnings results that saw adjusted EPS rise 12%.
The company has increased its dividend payments for 42 consecutive years and has paid dividends for 80 consecutive years. Kimberly-Clark is the focus of Part 46 of the 54-part Dividend Aristocrats In Focus series. Kimberly-Clark’s operations are analyzed below to give a better understanding of the company.
Business overview
Kimberly-Clark completed the spinoff of its health care division on November 1. The former health care division is now named Halyard Health (HYH, Financial). Kimberly-Clark now operates in three primary segments: Personal Care, Consumer Tissue and K-C Professional. Each segment’s percentage of total operating profit contributed through the first 9 months of fiscal 2014 is shown below to give an idea of the relative size of each segment:
- Personal Care: 53% of operating profits
- Consumer Tissue: 30% of operating profits
- K-C Professional: 17% of operating profits
The Personal Care segment is Kimberly-Clark’s largest based on both revenue and operating profits. The segment manufactures and sells diapers and feminine care segments. It claims three of the company’s five $1 billion brands: Huggies, Pull-Ups and Kotex.
The Consumer Tissue segment is Kimberly-Clark’s second largest. It controls arguably the company’s strongest brand in Kleenex, as well as the Viva, Scott, and Cottonelle brands. The Kleenex brand name is so strong, many people refer to all tissues as Kleenex.
The K-C Professional segment is Kimberly-Clark’s smallest based on both revenue and operating profit. The segment sells both general and cleaning supplies to businesses around the world. The segment sells to business using the Kleenex, Scott, WypAll, Kimtech and Jackson Safety brands.
Kimberly-Clark generates about 50% of its sales in North America. Europe accounts for another 15% of sales. Asia, Latin America and other regions account for 35% of the company’s revenue. Kimberly-Clark is geographically diversified and has significant exposure to quickly growing emerging markets.
Competitive advantage
Kimberly-Clark’s competitive advantage stems from its strong brand names and global distribution network. The company is focusing on its high-quality brands more than ever. The recent Halyard Health spinoff shows that management will continue to invest its cash flows into its core brands rather than expand into less profitable markets.
The strength of Kimberly-Clark’s brands cannot be overstated. The Kleenex, Pull-Ups, Scott, Kotex and Viva brands are all healthy. The company has grown its share of the adult care market from 51% in 2009 to 59% through the first half of 2014 due to strength in its Kotex, Poise and Depend brands. In addition, Kimberly-Clark controls 39% of the baby and child care market through its Huggies, Pull-Ups, GoodNites and Little Swimmers brands.
In addition to the company’s strong brands, Kimberly-Clark has an excellent global distribution network. The company sells its products in over 175 countries. Kimberly-Clark is currently restructuring its operations after the Halyard Health spinoff to better align its supply chain with its current offerings and to realize greater efficiencies.
Growth prospects
Kimberly-Clark is expecting EPS growth of about 8% in full fiscal 2014. Over the last decade, the company has grown EPS at about 5.2% a year. Revenue per share has grown at a similar pace. Kimberly-Clark is a net share repurcahser. The company has reduced its net share count by about 2.35% per year over the last decade.
Kimberly-Clark expects EPS growth in the mid- to high single digits going forward. This is a range of between 5% and 9%. The company will achieve growth by focusing on growing its core brands in emerging markets. Specifically, Kimberly-Clark is focusing on China, Russia and Latin America. The company has seen revenue grow at 13% from 2010 through 2013 in China, Russia and Latin America.
Dividend analysis and total shareholder return
Kimberly-Clark currently pays a dividend of $0.84 annually. This comes to a yield of nearly 3% at current prices. Kimberly-Clark has a payout ratio of 56% of expected 2014 EPS. The company’s management has stated it plans to increase the dividend in line with EPS growth. As stated above, EPS will likely grow in a range of 5% to 9% a year going forward. The company’s long dividend history should help investors feel confident in future dividend increases.
Kimberly-Clark offers solid total return potential for a high quality low-risk business. The company’s dividend yield of 3% combined with expected EPS growth of 5% to 9% yields an expected CAGR of 8% to 12% for shareholders going forward.
Valuation
Kimberly Clark is currently trading at about 19 expected full-year 2014 EPS. For comparison, the S&P 500 is currently trading at a P/E ratio of about 19.25 expected full year 2014 EPS. Kimberly-Clark has historically traded at about the same P/E ratio as the overall market over the last four years. As a result, I believe Kimberly-Clark to be fairly valued at this time.
Recession performance
Kimberly-Clark sells low-priced disposable consumer goods products that are relatively resistant to changing technology (how can you improve on a paper towel?) and maintain demand even during recessions. As a result, Kimberly-Clark performed well through the Great Recession of 2007 to 2009. The company’s EPS through the Great Recession are shown below:
- 2007 EPS of $4.25
- 2008 EPS of $4.06
- 2009 EPS of $4.52
- 2010 EPS of $4.45
Final thoughts
Kimberly-Clark is a high-quality business trading at a fair price. The company offers shareholders 8% to 12% total returns per year going forward. The company ranks in the Top 20 using The 8 Rules of Dividend Investing due to its solid dividend yield, reasonable payout ratio, decent growth and extremely low price standard deviation of just 17.5%. The company’s price standard deviation is among the lowest of any non-utility business in the S&P 500.
Kimberly-Clark makes a solid investment for investors seeking stability, growth and current income. The company has a long growth runway ahead in emerging markets and will likely capitalize on its potential due to the strength of its core brands.
