Published January 24th, 2017 by Bob Ciura
It has been seven years since the last recession. This is longer than the average time between recessions, so it could be argued the U.S. economy is overdue for a downturn.
If the U.S. economy does enter a recession, the stocks that will outperform typically come from stable industries like consumer staples. And, they tend to be dividend payers.
Kimberly-Clark (KMB) is one of those companies.
Kimberly-Clark has paid uninterrupted dividends to shareholders for more than 80 years. And, it has increased its dividend payout for the past 45 consecutive years, including a very recent 5.4% hike on Jan. 24.
Kimberly-Clark is a Dividend Aristocrat. These are companies in the S&P 500 Index with at least 25+ years of consecutive dividend increases each year.
You can see the entire list of Dividend Aristocrats here.
This article will discuss why Kimberly-Clark’s strong fundamentals and future growth potential justify its recent dividend raise.
Kimberly-Clark is a global consumer products giant. It has three core operating segments, which are as follows:
- Personal Care (50% of sales)
- Consumer Tissue (33% of sales)
- K-C Professional (17% of sales)
Kimberly-Clark’s Personal Care segment includes brands like Huggies, Pull-Ups, Kotex, Depend, and Poise.
The Consumer Tissue segment includes Kleenex, Scott, Cottonelle, and Viva, while the K-C Professional segment sells the company’s core products to workplaces.
Kimberly-Clark operates under an initiative called Global Business Plan, or GBP.
Source: Barclays Global Consumer Staples Conference, page 5
The GBP also includes a set of financial performance objectives, which are:
- Annual Organic Sales Growth: 3%-5%
- Annual Earnings-per-Share Growth: Mid-to-high single digits
- Return on Invested Capital: 20 basis point-40 basis point expansion
- Dividend Growth: In-line with earnings-per-share growth
The company has exceeded its objectives over the past decade.
From 2004-2015, Kimberly-Clark generated 4% organic sales growth, 6% earnings-per-share growth, 75 basis-point improvement in ROIC, and 8% dividend growth each year.
More recently, a few challenges have emerged for Kimberly-Clark. One is slowing economic growth in the emerging markets like China and Russia.
For example, organic sales in the emerging and developing markets increased 3% last quarter, a slowdown from prior quarters. Volume growth was offset by weaker pricing.
Another challenge is the strong U.S. dollar, which is negatively impacting the company’s international sales.
These challenges have made for a tough environment outside the U.S. This disproportionately hurts Kimberly-Clark because the company has accelerated its exposure to international markets over the past few years.
This has weighed on the company throughout the past year.
Source: Fourth Quarter Earnings presentation, page 5
Total net sales declined 2% in 2016, mostly due to currency. Foreign exchange reduced sales by 4% for the year.
The company did not meet its long-term financial objectives in 2016. But despite these pressures, Kimberly-Clark has a plan to keep earnings steady.
When a company encounters stiff headwinds like Kimberly-Clark has over the past year, it’s reasonable to question its ability to raise its dividend.
The good news is that Kimberly-Clark is not an average company. Thanks to its strong brands and global scale, the company can effectively squeeze out excess costs.
Kimberly-Clark is in the middle of a cost-cutting program called FORCE, which stands for Focus On Reducing Costs Everywhere. It is a broad, far-reaching initiative designed to reduce expenses across the business.
Source: Barclays Global Consumer Staples Conference, page 20
The company will generate significant cost-savings from FORCE. In addition, lower commodity prices will help the bottom line.
Kimberly-Clark realized $65 million in savings from lower input prices last year.
This is helping the company improve margins, even though sales are declining.
Source: Fourth Quarter Earnings presentation, page 6
In all, FORCE-related savings totaled $435 million in 2016. This helped company-wide gross margin expand by 70 basis points in 2016, even though net sales declined.
Another method the company is using to boost margins is raising prices. Kimberly-Clark has many brands that lead their repsective product categories. This provides pricing power.
In particular, K-C Professional is benefiting from this. Segment profit margin expanded by 100 basis points in 2016, driven largely from higher prices.
In addition to margin expansion, the company’s share repurchases will help grow earnings.
Source: 2016 Barclays Global Consumer Staples Conference, page 25
From 2003-June 2016, Kimberly-Clark reduced its share count by 28%. Fewer shares outstanding helps accelerate earnings-per-share growth.
As the company buys back shares, each remaining share receives a higher amount of earnings. This boosts earnings-per-share growth.
One of the best aspects of Kimberly-Clark stock is its dividend. Kimberly-Clark paid $12.4 billion of dividends over the past 12 years.
After the dividend raise, Kimberly-Clark now has a $3.88 per-share annual dividend.
In 2016, the company generated $6.03 of adjusted earnings-per-share. Earnings-per-share rose 5% from the previous year, thanks to cost cuts and price increases.
As a result, the stock has a payout ratio of 64%.
In other words, Kimberly-Clark currently distributes slightly less than two-thirds of its earnings-per-share in dividends. This is a healthy payout ratio, and leaves sufficient room for continued dividend increases going forward.
The company should be able to grow dividends at a similar rate as earnings-per-share growth. This way, the payout ratio going forward will not rise from its present level.
Kimberly-Clark has a current dividend yield of 3.1%. By comparison, the S&P 500 Index has an average dividend yield of 2%.
It may take a few years for Kimberly-Clark to return to double-digit annual dividend increases. More modest raises are prudent, given the company’s struggles to grow revenue.
That being said, Kimberly-Clark can still provide solid dividend increase in the 4%-6% range going forward. These increases will still handily exceed the rate of inflation, which protects investors’ purchasing power.
Consumers will always need paper towels, diapers, and tissues. And, in a low interest rate environment, a 3.2% dividend yield and mid-single digit dividend growth is nothing to sneeze at.