Kimberly-Clark (KMB) is a diversified, international paper-products company.
-Five year annualized revenue growth: 5%
-Five year annualized earnings growth: <1% -Five year annualized EPS growth: 5% -Dividend Yield: 4% -Dividend Growth: 9% -Moderately weak but stable balance sheet. -With a P/E of 14, and an above-average dividend yield with decent dividend growth prospects, KMB is in a good position to provide reasonable risk-adjusted returns to shareholders.
Kimberly-Clark (NYSE: KMB) is a leading international paper products company. Founded in 1872 and incorporated in 1928, Kimberly-Clark has over 56,000 employees. Top brands of the company include Kleenex tissues, Scott paper towels and toilet paper, Cottonelle toilet paper, Huggies diapers, Depend adult diapers, Kotex feminine products, Pull-Ups, and more.
The primary raw ingredient for many of their paper products is Cellulose fiber. Synthetic super-absorbent materials are important materials for many of their products as well.
Kimberly Clark is broken down into four main segments.
This segment includes diapers, training and swim pants, feminine products, and incontinence products. Sales for 2009 for this segment were $8.4 billion, which represents 44% of the total sales, and the operating profit margin was 20.8%.
This segment includes facial issue, bathroom tissue, and paper towels. Sales for 2009 for this segment were $6.4 billion, which represents 33% of the total sales, and the operating profit margin was 11.5%.
K-C Professional and Other
This segment includes disposable health and hygiene products for commercial use. This includes facial tissues, bathroom tissue, paper towels, wipers, absorbent products, and safety products. Sales for 2009 for this segment were $3.0 billion, which represents 16% of the total sales, and the operating profit margin was 15.4%.
This segment includes disposable surgical products, infection control products, gloves, pain management products, and more. Sales for 2009 for this segment were $1.4 billion, which represents 7% of total sales, and the operating profit margin was 17.8%.
Kimberly-Clark operates globally. 53% of total sales came from North America, 31% came from Asia, Latin America, and Other, and 16% came from Europe. The company also has facilities around the world, including 28 in North America, 20 in Europe, and 64 in Asia, Latin America, or elsewhere.
Revenue, Earnings, Cash Flow, and Margin
Kimberly-Clark has been consistently growing company revenue, but earnings have remained flat.
KMB has grown revenue by an average of 5% annually over the past five years.
Company earnings growth has averaged less than 1% annually over this five-year period. Over the previous twelve months, however, KMB has increased earnings to over $1.9 billion, so numbers for 2010 likely will have improvement over 2009.
In 2004, KMB reported an EPS of $3.61. In 2009, KMB reported an EPS of $4.52. So, EPS growth over this same time period has been nearly 5% annually due to share repurchases.
Cash Flow Growth
Cash flow from operations has grown by an average of 5% annually. All of this growth occurred due to the results from 2009, which included a half-billion-dollar reduction in inventory along with large increases in accounts payable and other current liabilities, and a decrease in working capital.
Kimberly-Clark has a net profit margin of 10%. Return on Equity (ROE) is nearly 35%, though this largely is inflated by their leveraged position. Return on Investment (ROI) is over 18%.
The P/E ratio is a bit over 14 and the P/B ratio is nearly 5.5.
Kimberly-Clark has been paying quarterly dividends continually since 1935. As of this writing, KMB offers a dividend yield of approximately 4% with a payout ratio of less than 55%.
Kimberly-Clark has grown its dividend by approximately 9% annually over the past six years. Besides the peak in 2009 due to the stock market bottom, the company’s dividend yield has been increasing just about every year. This is due to KMB being at a much lower valuation than in previous years.
KMB generates a very attractive amount of free cash flow, which is cash flow from operations minus capital expenditures. The company reported more than $1.4 billion in free cash flow in 2007, more than $1.6 billion in 2008, and more than $2.6 billion in 2009. Since the company pays less than $1 billion in dividends each year, the dividend is well-covered by free cash flow.
Kimberly-Clark has a long-term debt/equity ratio of 0.9, which is not as low as I would like to see. Of the approximately $5 billion in total shareholder equity, more than $4.8 billion of it consists of intangibles and goodwill.
The interest coverage ratio is over 10, which means KMB’s debt is well-covered by earnings and therefore quite safe. The company is leveraged but not overly so.
Kimberly-Clark is a defensive stock with an above-average dividend yield and a low-to-moderate P/E ratio. The company generates a significant amount of cash flow, and uses much of it for dividends and share repurchases. Share repurchases at reasonable prices help the company continually increase its EPS and dividends-per-share.
In 2003, Kimberly-Clark launched their Global Business Plan. The goals of the plan are as follows:
Top Line Growth: 3-5%
EPS Growth: mid-high single digits
Operating Margin Improvement: 30-50 basis points
Capital Spending: 4.5%-5.5% of net sales
ROIC Improvement: 20-40 basis points
Dividend Increases: In Line with EPS
EPS growth in the mid-to-high single digits coupled with a 4% dividend yield results in a low-double-digit rate of return. Perhaps 10%, assuming that the valuation doesn’t significantly decrease over the long-term. In an era where some people are predicting that the “new normal” will be 5% or so returns from equities, aiming for around 10% with recession-resistant products is pretty good.
The company has been making several acquisitions recently. In 2009, KMB acquired the remainder of Andrean (a current subsidiary), Jackson Products (a safety products company), Baylis Medical Company’s pain management business, I-Flow Corporation (producer of drug delivery systems, pain relief products, and surgical site care).
Kimberly-Clark has a portfolio of quite strong brands. One of the biggest accomplishments a marketer can achieve is to literally turn their brand name into the universal name of that product. For instance, many people refer to Cola products as “Coke” regardless of whether it’s actually a Coca Cola product or a competitor’s product. In Kimberly-Clark’s case, many people literally refer to tissues as a “kleenex” whether it’s actually a Kleenex product or a different brand. To a lesser extent, Kimberly-Clark has done the same with their Huggies brand of diapers.
Kimberly-Clark, like any company, faces risk. Although the company produces a set of necessary products, the company does face some risk from economic weakness. KMB also faces risks from commodity costs and currencies. Walmart (WMT) alone accounted for 13% of KMB sales in 2009, so that’s a fairly important relationship. Competition is also quite intense, as although the brand-names are strong, the products are easily switchable and consist of basic materials.
Conclusion and Valuation
In conclusion, Kimberly-Clark may make for a good defensive stock pick. With a P/E ratio of 14, the stock is moderately valued. The company has strong brands, but also operates in an industry where products are easily replaceable. The balance sheet is a bit of a weakness as well. On the other hand, cash flow, and particularly free cash flow, is abundant. Most of the shareholder returns will be due to consistent dividends and share repurchases, and the overall risk-adjusted return looks favorable.
Full Disclosure: I do not have any position in KMB at the time of this writing. I have no position in WMT, and I do own shares of KO.
You can see my full list of individual holdings here.
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You note that KMB’s debt/equity ratio of 0.9 is higher than you’d like to see. According to MSN money the ratio is even worse than that, 1.12! However, the most troubling thing is that the ratio has been rising for the last couple of years.
Good analysis! This is an interesting company . Its pretty similar to P&G in my view. I like its line of business and stability. What I dont like is (same objections as for P&G):
* Too much debt. Not much equity without goodwill/intangibles, PB without goodwill is above 10. KMB does cover it interest payments with ease but I would still like to see more defensive financing.
* Too many aquisitions. I prefer companies that grow on their own.
But I think both P&G and KMB can make good contributions at this valuation. However I like defensively run companies. Im a bit extreme, my financing criteria leaves out almost all of the global consumer companies except KO. Meanwhile I bring in financial- and oilcompanies with so much more business risk (but very low valuation). Not entirely rational perhaps..
I don’t know… after watching The Office and seeing the struggles of Dunder Mifflin, I feel the need to dodge paper companies ;)
All joking aside–great analysis as always.
Great analysis. Really detailed and clear
Long-term debt/equity is 0.9. Total debt/equity is 1.12. They are different metrics (total debt/equity takes into account short term debt as well as long term debt.)
I agree with what you say about debt, but personally I prefer PG to Kimberly Clark, as PG doesn’t have as much relative debt. They have a higher interest coverage ratio as well as a more diversified product line.
Well done Matt. I don’t own KMB myself, but when I was looking at some steady U.S. dividend-payers for my RRSP, I considered it. It was either KMB, LLY, KO, PG or XOM. In the end, I chose KO since everything I read about it said it was “the one” to own. I intend to never sell it, as long as it pays me that is :)
Thanks Financial Cents.
LLY is something I think only people particularly experienced in health care should touch. It’s got an incredibly low valuation along with a high dividend, but it’s facing an upcoming patent cliff and therefore just sacrificed its dividend aristocrat status. Regardless of whether it ends up outperforming or underperforming, I don’t think it’s core holding material.
The rest seem pretty solid. KO is basically bulletproof, but at a premium price. XOM is great too; I expect it to probably outperform on that list but with a bit extra risk. PG and KMB are great additions as well, but a bit more leveraged.
I agree XOM will likely outperform KO, but with a higher risk of bad press. Good thing XOM has a relatively good reputation as an oil company. However, you never know when something odd might pop up in a soda can. Sorry to bring that up, Pepsi… You were vindicated!
Anyway, I’m considering picking up shares of KMB tomorrow, as the price dropped just under 6% today and the P/E is closer to 13.5 now. The higher amount of debt does worry me, but I’m counting on KMB outperforming PG since its market cap is about seven times smaller than PG and the dividend is about 20 cents more per quarter.
Wish me luck…
Great analyis again Matt
I’ve often wondered though, why debt to equity is focused on rather than debt to earnings. If we sell equity to repay debts, we’re potentially shooting the money machine in the foot.
I think the way you analyze these stocks is fabulous. You’re probably providing a far better service than you think.
When thinking of “selling equity” I’m referring to the cash generating “equity” like plants and machinery, which often make up the bulk of “equity” on the books.
Sounds good Pey. Kimberly-Clark’s price drop seems to be an overreaction to what they released.
I appreciate the positive feedback.
The interest coverage ratio is a useful metric to compare debt to earnings, and one that I use when dealing with high-debt companies like Kimberly-Clark.
I picked up KMB today for $62.00 a share! Can’t wait to reinvest my first dividend payout in a few months!
Hi Pey, thanks for the update.
I’m sure you did your homework on the investment, and I wish you luck that the investment works out very well.