Updated on February 19th, 2019 by Josh Arnold
The Dividend Aristocrats are a group of 57 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
We review each of the 57 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 47 consecutive years. It also currently has a 3.5% dividend yield, which is well above the 1.9% average dividend yield of the S&P 500.
You can watch a video on Kimberly-Clark’s dividend safety below:
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 giant that operates in 175 countries. It manufactures a wide range of products, including paper towels, diapers, tissues, and more, that are arranged into three reporting segments:
- Personal Care (~50% of sales)
- Consumer Tissue (~32% of sales)
- K-C Professional (~18% of sales)
Kimberly-Clark’s stable of brands is in the number 1 or 2 market share position in 80 countries around the world, which is an incredible feat.
Kimberly-Clark’s Personal Care segment includes the Huggies, Pull-Ups, Kotex, Depend, and Poise brands. This is the company’s largest business segment as measured by sales.
Source: Barclays Global Consumer Staples Conference, page 20
The Consumer Tissue segment includes Kleenex, Scott, Cottonelle, and Viva. Lastly, K-C Professional services businesses and workplaces.
Kimberly-Clark’s strong brands provide the company with profitability and steady growth. The company’s full-year 2018 results showed organic revenue up just over 1% as price/mix as well as volume were up slightly.
Forex translation reduced sales by about 1% as Kimberly-Clark’s significant global presence, combined with strength in the US dollar, made top line growth a bit more difficult.
Adjusted operating profits fell in 2018 against 2017 thanks to $795 million of higher input costs, which Kimberly-Clark has struggled with for years, that was only partially offset by cost savings.
Still, a lower share count, the organic sales increase, as well as a lower tax rate helped drive adjusted earnings-per-share growth of 6%. Even in a down year, Kimberly-Clark was able to deliver respectable adjusted earnings-per-share expansion.
Going forward, the company has committed to elevating its core business, driving further growth in its developing and emerging markets (D&E), and expanding its digital marketing and e-commerce capabilities.
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 underpenetrated categories to drive market share gains and ultimately, higher revenue and profit.
The second growth pillar is accelerating growth in its D&E markets, which make up about 30% of total sales today. 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: Earnings 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 underperforms today, and that should help drive some incremental growth.
The final pillar of growth is driving digital marketing and e-commerce. Kimberly-Clark has committed to building one-to-one consumer relationships by investing more in digital marketing.
Specifically, it will utilize data to engage in precision targeting of relevant consumers, which should help improve loyalty and consumer engagement. This growth pillar has some overlap with the second one in the D&E markets as Kimberly-Clark is using this strategy in its growth areas in particular.
Kimberly-Clark also continues to pursue cost savings and as mentioned, they continue to add up to hundreds of millions of dollars annually. The company is attacking earnings-per-share growth from all angles: revenue growth, margin expansion and share repurchases.
In total, management sees adjusted earnings-per-share of $6.50 to $6.70 for 2019, which is essentially even with 2018 results.
Management does see better earnings in the second half of the year after pricing increases have been allowed to impact the top line, and also said the company’s tax rate will move up 3 to 4 points, creating a drag on net earnings.
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 keep costs steady, 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 $6.60 at the midpoint of 2019 guidance, Kimberly-Clark trades for a price-to-earnings ratio of 17.9. Our estimate of fair value is 18 times earnings based upon its historical valuations, so it is trading right at fair value.
Given that the stock is fairly valued, we don’t see any impact on total returns from the valuation one way or the other.
Instead, future returns will be generated from earnings growth and dividends. Given the company’s strong brands and growth catalysts, average annual earnings growth in the mid-single digits is a reasonable expectation.
In total, we see annual returns of 7.5%, consisting of the 3.5% dividend yield, 4% earnings-per-share growth, and essentially no impact from the valuation.
Given the strong yield, 47-year history of dividend increases and moderate growth expectations, we rate the stock a buy for dividend growth investors.
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.
Kimberly-Clark has been in operation for more than 100 years, and currently has a dividend yield of 3.5%. It therefore meets our definition of a blue-chip stock.
With the stock at its fair value with a high yield and improving growth prospects, we rate Kimberly-Clark a buy. We believe its strategic plan is prudent and should drive some growth in the coming years while shareholders collect a 3.5% yield.