Updated on April 1st, 2021 by Bob Ciura
Investors looking for high-quality dividend growth stocks should take a closer look at the Dividend Aristocrats, a group of 65 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
With this in mind, we created a list of all 65 Dividend Aristocrats. You can download the full spreadsheet of all 65 Dividend Aristocrats, along with several important financial metrics such as dividend yields and price-to-earnings ratios, by clicking on the link below:
We review each of the Dividend Aristocrats annually, and the next stock in this year’s edition is consumer products giant Kimberly-Clark (KMB).
Kimberly-Clark has raised its dividend for a very impressive 49 consecutive years. It also currently has a 3.3% dividend yield, which is more than double the ~1.6% average dividend yield of the S&P 500 Index.
This article will discuss Kimberly-Clark’s business model, growth potential, and whether the stock is trading at an attractive valuation right now.
Kimberly-Clark traces its beginnings back to 1872. Four young businessmen, John A. Kimberly, Havilah Babcock, Charles B. Clark, and Frank C. Shattuck, came up with $30,000 of start-up capital to form Kimberly, Clark and Co.
Today, Kimberly-Clark is a global consumer products company that operates in 175 countries and sells disposable consumer goods, including 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), generating ~$20 billion in annual revenue. Kimberly-Clark is a large-cap stock with a market capitalization of $48 billion.
Source: Investor Presentation
Kimberly–Clark reported fourth quarter and full–year earnings on January 25th, 2021 and results were better than expected on both the top and bottom lines. Total revenue was up 6% during the quarter to $4.8 billion. Organic sales were up 5%, as net selling prices rose 3% while volumes grew 2%.
For 2020, organic sales increased 6%, as volumes rose 4% and net selling prices and product mix each rose by 1%. Adjusted earnings per share of $7.74 in 2020 increased 12% from $6.89 in 2019. This was a very strong performance for Kimberly-Clark, particularly since the U.S. economy fell into a recession due to the coronavirus pandemic. Kimberly-Clark proved its resilience, and benefited from higher demand for personal care products.
Kimberly-Clark expects 2021 to be another year of growth. The company guided for organic sales growth of 1% to 2% for 2021, and for earnings–per–share growth of 1.5% at the midpoint of guidance. Along with providing quarterly earnings, the company also raised its dividend for the 49th consecutive year, boosting its dividend by 6.5%. A new $5 billion share buyback authorization was also announced, with buybacks of $650 million to $750 million expected in 2021.
Kimberly-Clark has committed to elevating its core brands as one of the three pillars of growth in the coming years. It will do this by launching different product innovations via extensions of existing lines and entirely new products. The company will also continue to manage its revenue via pricing and mix as well as promotional strategies.
Finally, it will use its significant marketing expertise to go after under-penetrated categories to drive market share gains and ultimately, higher revenue and profit.
The second growth pillar is accelerating growth in its developing and emerging (D&E) markets, which make up a significant portion of the company’s sales. The company will focus on its personal care and professional segments in particular, with its largest opportunities coming from places where it has low category penetration and frequency of usage.
Source: Investor Presentation
The company’s focus for D&E development is Latin America and China in particular, with smaller markets seeing a meaningful push as well. Kimberly-Clark plans to use its significant supply chain and marketing experience to pursue growth in areas where it under-performs today, and that should help drive some incremental growth.
Kimberly-Clark also continues to pursue cost savings, which add up to hundreds of millions of dollars annually. The company realized $575 million of cost savings in 2020, and expects another $400 million to $460 million in 2021.
Therefore, the company is attacking earnings-per-share growth from all angles: revenue growth, margin expansion and share repurchases.
With operating margins rising steadily, increasing profitability is working to offset somewhat weak revenue numbers. Kimberly-Clark’s management team has extended this initiative for another three years, aiming for another $1.5 billion of cumulative savings by 2021. Overall, we expect 2%-3% annual EPS growth over the next five years.
Competitive Advantages & Recession Performance
Kimberly-Clark’s most important competitive advantages are its brands and global scale. The company enjoys a leadership position across its brand portfolio and indeed, across the world.
It retains its competitive advantages through marketing and innovation. Kimberly-Clark spends over $1 billion each year on advertising and research and development. This allows the company to stay ahead of the competition. Given its commitment to its growth pillars, we expect this will only increase over time.
In addition, Kimberly-Clark’s global reach provides the company with the efficiency to keep costs low. The FORCE program is an example of its ability to manage costs, even as revenue grows, and has seen years of success in reducing operating costs.
Kimberly-Clark remains highly profitable, even during recessions. For example, it performed well through the Great Recession of 2007-2009. Its earnings-per-share through the Great Recession are shown below:
- 2007 earnings-per-share of $4.25
- 2008 earnings-per-share of $4.06 (4.5% decline)
- 2009 earnings-per-share of $4.52 (11% increase)
- 2010 earnings-per-share of $4.45 (1.5% decline)
As you can see, while Kimberly-Clark did see earnings decline in 2008 and 2010, it also registered a double-digit growth rate in 2009. The reason for its strong performance over the course of the recession is that the company sells products that consumers need regardless of economic conditions.
Consumers will always need personal care products, regardless of the condition of the economy. This gives Kimberly-Clark a certain level of product demand each year, even during recessions.
Valuation & Expected Returns
Based on adjusted earnings-per-share of $7.80 at the midpoint of 2021 guidance, Kimberly-Clark trades for a price-to-earnings ratio of 17.6.
Excluding outlier years, Kimberly-Clark has traded at an average price-to-earnings ratio of ~18 over the last decade. This is also our estimate of fair value for the stock. The valuation has moderated somewhat of late, but shares still trade in excess of our estimate of fair value.
If the stock valuation expands from 17.6 to 18 over the next five years, it would lift annual returns by 0.5% per year. In addition, future returns will be generated from earnings growth and dividends. Given the company’s strong brands and growth catalysts, average annual earnings growth of 2.5% is a reasonable expectation. The stock also has a 3.3% dividend yield. In total, we see annual returns of 6.3% over the next five years.
Given the strong yield, 49-year history of dividend increases and moderate growth expectations, we rate the stock a hold for dividend growth investors. But the stock is not a buy for new investment right now due to the high valuation.
Kimberly-Clark is a high-quality company with a diverse portfolio of strong brands. It has positive growth prospects moving forward, and it is an extremely reliable dividend stock. Future earnings growth will be highlighted by emerging markets, cost reductions, and share repurchases.
Kimberly-Clark has increased its dividend for 49 years in a row, and currently has a dividend yield of 3.3%. It therefore meets our definition of a blue-chip stock, and it should continue to deliver steady dividend increases each year.