Kimberly-Clark (KMB) is a consumer products company that manufactures and sells personal care products.  Brands investors will recognize include Huggies, Pull-Ups, Kotex, Depends, Kleenex, Cottonelle and Viva paper towels.  The company also has a professional segment selling workplace health/safety products such as soaps, sanitizers, tissues and towels.  They also operate a health care segment providing medical supplies, infection prevention and health education.

Kimberly-Clark has a long reputation of dividend growth.  For 41 years in a row, Kimberly-Clark has been rewarding loyal shareholders with increasing dividend income payments.

Dividend Growth and Current Yield

Kimberly-Clark currently pays a dividend of $0.81 per quarter for a $3.24 annual dividend.  At the close of market on Friday, May 3rd, KMB’s price per share was $105.38.  This gives the stock a current dividend yield of 3.08% (3.24/105.38).

In 2003, Kimberly-Clark payed an annualized dividend amount of $1.36 per share.  The dividend trend has been up each year as it now pays $3.24 annually per share.  This gives KMB a 10 year annual compound dividend growth rate of 9.07%.  More recently the annual dividend growth rate was 5.72% for 2011 to 2012 and 9.46% from 2012 to 2013.

The dividend growth rate has continued above the rate of inflation.  I personally look for dividend growth at or above the 7% per year level.  Kimberly-Clark has done a good job growing their dividend through the years at a decent growth rate.

Earnings Per Share Growth

Kimberly-Clark had a 2002 earnings per share (EPS) of $3.36 and a 2012 EPS of $4.42.  Over the 10 years their earnings per share have been consistently climbing upward.  KMB has had a 10 year EPS growth rate of 2.78% which is a lower growth rate than I normally would look for.

More recently Kimberly-Clark’s annual EPS growth rate was 10.78% from 2011 to 2012.  While this seems like a good growth rate, it is due to a drop in earnings back in 2011.  In fact, KMB’s 2012 EPS is similar to the EPS from 2009 and 2010.  So KMB’s earnings per share has been relatively flat the past 3 years.

While the flat EPS growth is concerning, Value Line has an estimated growth rate of 9% for future years so possibly things can pick back up for the company.

Net Income Growth

Net income was growing from 2002 through 2007 but has faltered in recent years.  Net Income was 1,748,500,000 in 2002 and was basically the same in 2012 at 1,750,000,000.  It appears KMB has been able to grow EPS, although at a small rate, mostly due to share repurchases.  It is concerning to see the lack of growth over the past few years from this consumer products company.

Sales Growth

Sales have been growing for Kimberly-Clark over the past 10 years in a consistent uptrend.  The compound annual growth rate of sales revenues was 4.5%.  So while there has been sales growth for KMB over the past decade, the company has failed to translate increasing sales into increasing net profits.  This is most likely due to increasing expenses.  When comparing profit margins over the past decade it appears they are contracting due to higher expense pressures.
While it is concerning that KMB’s higher sales haven’t meant higher net earnings, it may be a positive sign that the company is still able to grow sales.  Perhaps there is hope that if KMB can get their expenses back under control and increase their profit margins then they may begin to show more earnings growth.

Outstanding Shares

Generally I like to see a decreasing trend or at least a consistent balance in the number of outstanding shares of the company.  Since 2002, KMB’s outstanding share count has been decreasing every single year.  Over the past 10 years the company has decreased the number of shares outstanding by about 23%. 

With less shares outstanding, the value of each share still available increases.  When a company decreases the number of shares available it means the shares I own will have rights to a greater portion of the companies profits.  I like seeing that management has shown a commitment of purchasing back shares and increasing current owners percentage of the company.  Along with dividends, a decreasing share count is a way for management to return value to shareholders.

Current Ratio

Current ratio measures a companies ability to meet short term obligations.  Kimberly-Clark has a 2011 FYE current ratio of 1.16.  This means that current assets will be able to cover 116% of current liability obligations.  I generally want to see this number be above 1 which KMB has no problem with.  The company will have no problem meeting current liability obligations.

Net Profit to Long Term Debt

This number tells me how many years worth of profits it will take to pay off the current long term debt of the company.  I like looking at this metric because it gives me an idea of whether the company has taken on too much debt or not.

Generally I look for this number to be less then 5 meaning if the company used all their earnings over the next 5 years they could wipe out all debt.

For Kimberly-Clark this net profit to long term debt ratio stands at about 2.9 for 2012.  This means Kimberly-Clark would be able to pay off all long term debt with about three years worth of profits.  In my opinion Kimberly-Clark does not have too much debt on their balance sheet.

Make note that the amount of long term debt has been increasing every year on Kimberly-Clark’s balance sheet.  Investors with a stake in KMB would be wise to monitor the debt to make sure the company doesn’t become at risk in the future.

Dividend Payout Ratio

The dividend payout ratio measures the dividend per share compared to the earnings per share.  How much of a companies earnings per share are they paying out to shareholders in the form of a dividend.

The past few years KMB has maintained a dividend payout ratio around 50-60%.  This tells me that Kimberly-Clark is paying out around 60% of profits to shareholders and keeping 40% of profits to grow the company and increase shareholder value through share repurchases.

It should be noted that the dividend payout ratio has been gradually increasing over the past decade.  Shareholders will want to monitor this to make sure the dividend growth streak is not at risk in the future.

Price/Earnings Ratio

The P/E ratio is a metric I look at to determine if a companies current stock price is too high or within reason.  With the most recent closing market price of $105.38 and most recent EPS of $4.42, KMB has a current P/E right around 23.8.  Typically the market P/E average is right around 14 so compared to the market in whole I might determine KMB to be overvalued.

Looking at KMB’s past P/E ratios of the last few years it looks like they have ranged from a high of 23 to a low of 10.  The current P/E of 23.8 is at the high end of that range.  In fact, KMB is currently trading just below their 52 week high price.  KMB is very in favor right now as many investors have looked towards dividend paying companies for income while bond interest rates are so low.

Return Projections

Kimberly-Clark had EPS of $4.42 in 2012.   The past earnings per share growth rate has been roughly around 9% but we calculated basically no growth in net income.  Therefore I am going to use a more conservative EPS growth rate of 4% over the next 10 years to figure out what 2022 EPS might look like.  This gives me an estimated EPS of $6.54 for KMB in 2022.

If KMB is trading at reasonable P/E ratio of 14 in 2022 then it will have a market price of $91.56/share (6.54*14).  This will give me an estimated annual growth rate for Kimberly-Clark of -1.4% over the next 10 years.  With these estimates I am predicting a loss for investors of KMB over the next decade.  Dividend income will help offset these losses but this is not an ideal situation.

This is a very rough exercise based on growth estimates that may not come to reality.  Actual returns in KMB will vary depending on how well the company increases their earnings and how the market values Kimberly-Clark in the future.

Recommendation

Based on the above analysis, I believe Kimberly-Clark to be a bad buy at current price levels.  I believe the company is currently over valued and has not shown a good ability to grow sales and profits over the past decade.  In fact, with the market offering such a high value for KMB, and many other better options available to purchase, I would strongly considering selling a position in KMB and looking for better opportunities elsewhere at the present time.

Kimberly-Clark is definately a company I am interested in as a dividend growth investor.  They are a consumer products company with some very strong brand names with high consumer loyalty.

However, with that being said, I would not purchase KMB until they have shown an ability to grow profits again.  I would also wait until a more reasonable price from the stock market before thinking about making a buy in this company.

Do you have an opinion on Kimberly-Clark?  Please share your thoughts in the comments below!

Disclosure:  I do not own any shares of KMB.

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12 Responses to Kimberly-Clark Dividend Stock Analysis

  1. KMB is a good example of an overvalued dividend stock. I agree with your analysis. I couldn’t pay 23x earnings for a stock that is growing earnings at 2.7% a year. I think the market regards the business as safe and sustainable and is giving it a temporary premium right now.

    • Dan Mac says:

      I agree with you Zach. The market does regard KMB as a safe stable blue chip company and those types of companies are going at a premium right now. Another thing I read is KMB is in the middle of a restructuring process which should help expand margins and hopefully get them back on the right track. Personally I prefer to wait and see if their actions provide real results before jumping in though.

      I still think there are some other good dividend growth stocks worth buying at the current time though. They are just getting harder and harder to come by!

      • I like KMB and would continue to own it, because I believe that it can generate much more in earnings growth than what we have seen over the past decade. KMB is the type of business I would be happy to own for the next 2- 3 decades.

        I looked at the adjusted EPS that the company posted at the annual press release, and it looks like some restructuring costs are depressing dilluted EPS. Whether you find those to be one-time items, or not, is up for debate; either way the company is a hold and will do well over time.

        I liked your projection of EPS to 2022 and P/E ratio also. I did a similar analysis on BF/B, and found that I should hold it. However, for KMB if you add the growing stream of dividends over the next 10 years, and if you assume reinvestment, you can probably generate at least 3%-4% in total returns/year. And if the P/E ratio only compresses to 20 you might be in for a pleasant surprise.

        • Dan Mac says:

          Thanks for your thoughts Dividend Growth Investor. KMB is the classic type of company I want to own but unfortunately they haven’t been getting the job done the past few years. I’ve read about the restructuring and hopefully management can get the company back growing and profitable. If they can and the stock is ever at what I consider a fair value you can bet I will be looking at a possible purchase. Until then I’ll seek better opportunities.

  2. I agree with Zach, P/E ratio seems a little bit over the roof right now. On the other side, it’s the case of most big consumer products companies (PG, CL, CLX, etc). I guess it’s the price to pay in a rough economy for stable dividend payer…

    • Dan Mac says:

      I agree Dividend Guy. Right now the stable safer blue chip companies are selling at a premium as people are starving for income and looking towards these companies. Personally I’ll wait on purchasing these companies until we see a market correction (which we inevitably will just not sure when).

      I think there are still some decent buys out there though for dividend growth investors. Just getting harder to find lately.

  3. I totally agree that on your assessment. It’s a shame that it’s so overvalued because I like their prospects going forward, but not at current prices for a total return perspective.

    • Dan Mac says:

      Thanks for the comments JC. It seems current prices of many consumer products companies are fairly high right now. There are lots of great companies I would love to own in my portfolio but unfortunately at the price levels they are selling right now I am not willing to be a buyer.

      We just have to be patient and the time will come soon enough where we can snatch up some of these great companies at decent prices again!

  4. [...] Growth Stock Investing does a deep dive on Kimberly-Clark’s dividend fundamentals. We both agree that the stock is trading a to high of a valuation to make a move on it [...]

  5. [...] Kimberly-Clark Dividend Stock Analysis  @ Dividend Growth Stock Investing [...]

  6. Integrator says:

    I actually really like the business. KMB has a portfolio of strong brands, and its the type of business I would normally gravitate toward. I do agree with your assessment that they are overvalued at this stage. PE and current yield are all significantly higher than 5 year averages without any reason to suggest stronger growth on the horizon. I have owned KMB in the past 2009-2010, was much more reasonably priced then.

    • Dan Mac says:

      I also really like KMB as a business and like you they are exactly the kind of company I prefer to own. It is easy to understand how they make their money and they have a strong portfolio of brands that will stand the test of time. My fear with the company however is seeing a lack of growth over the past few years along with the high current valuation. If these two things change I will be first in line to pick up some shares of KMB!

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