Updated on January 6th, 2020 by Bob Ciura
The Dividend Aristocrats are a group of 57 companies in the S&P 500 Index, with 25+ consecutive years of dividend increases.
You can see a full downloadable spreadsheet of all 57 Dividend Aristocrats, along with several important financial metrics such as price-to-earnings ratios, by clicking on the link below:
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% dividend yield, which is well above the ~1.9% 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 over $18 billion in annual revenue. Kimberly-Clark trades with a market capitalization of $47 billion.
Source: Investor Presentation
Kimberly-Clark reported third-quarter earnings on October 22nd and results were quite strong. Total revenue came in at $4.6 billion during the quarter, a 1% increase year-over-year. Changes in currency exchange rates removed 2% from the top line, due to the company’s global reach.
Divestitures also slightly reduced sales, but organic revenue was up a very impressive 4% in the third quarter. Pricing increases led to a 4% gain in revenue while mix added another 1%; volumes declined 1% to offset the mix gain.
Operating profit came to $859 million on an adjusted basis in the quarter, up from $798 million in the year-ago period. Cost savings totaled $50 million from the company’s FORCE program (which stands for Focused On Reducing Costs Everywhere), as well as another $45 million in cost savings from last year’s global restructuring program.
Adjusted earnings-per-share came to $1.84, up from $1.71 in the comparable period in 2018. The company also boosted guidance, leading us to increase our estimate for earnings-per-share this year to $6.85.
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 developing and emrging (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: 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 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.
Source: Investor Presentation
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. This will be the main growth driver in the upcoming years, as it was again in the third quarter.
Management also recently unveiled its K-C Strategy 2020, which aims to further optimize the company’s operations and boost revenue in the coming years. The strategy targets mid-single-digit growth in adjusted earnings-per-share, -1% to +3% organic sales growth, and dividend growth in-line with earnings-per-share growth.
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 $6.85 at the midpoint of 2019 guidance, Kimberly-Clark trades for a price-to-earnings ratio of 19.9.
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 shares eventually revert to the security’s historical mean, this could subtract 2% annually from prospective annual returns.
Instead, future returns will be generated from earnings growth and dividends. Given the company’s strong brands and growth catalysts, average annual earnings growth of 4% is a reasonable expectation. In total, we see annual returns of 5%, consisting of the 3% dividend yield, 4% earnings-per-share growth, and a 2% annual reduction from a declining valuation multiple.
Given the strong yield, 47-year history of dividend increases and moderate growth expectations, we rate the stock a hold for dividend growth investors. 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 been in operation for more than 100 years, and currently has a dividend yield of 3%. It therefore meets our definition of a blue-chip stock, and it should continue to deliver steady dividend increases each year.
That said, with the stock above its fair value, we rate Kimberly-Clark a hold. The stock could earn a buy rating once again, if the share price declines at or below our fair value estimate.