I’m always on the hunt for hidden gems in the dividend-growth world. Sometimes looking for acorns in the forest leaves you scratching your head, wondering why you’re not just logging the trees. I do believe in keeping an eye out for great and potentially unknown dividend-growth companies but sometimes the best known companies are that way for a reason. Kimberly-Clark fits into that category.
A little about the company, per Morningstar:
Kimberly-Clark is a leading player in the global health and hygiene category selling bathroom tissues, diapers, feminine products, and paper towels. Its brands include Kleenex, Scott, Huggies, Pull-Ups, and Kotex. Kimberly sells its products directly and distributes them through supermarkets, mass merchandisers, and drugstores, among other outlets. Sales generated outside of North America account for about 45% of the firm’s consolidated sales base.
That sums things up pretty nicely. I look at Kimberly-Clark like a miniaturized version of Procter and Gamble. They are pretty focused on household goods, and paper products are something that people aren’t going to stop buying tomorrow. I also like the fat that almost half of sales are generated internationally. International exposure is something I prize in my personal portfolio, the Freedom Fund.
Let’s take a look at some numbers.
Earnings per share have grown 5.7% annually from 2005-2010. Not too shabby, but not explosive either. Growth has slowed since 2007.
Earnings Per Share ($)
1Q 2Q 3Q 4Q Year
2010 0.92 1.20 1.14 1.20 4.45
2009 0.98 0.97 1.40 1.17 4.52
2008 1.04 1.01 0.99 1.01 4.06
2007 0.98 1.00 1.04 1.07 4.09
2006 0.60 0.82 0.79 1.05 3.25
2005 0.93 0.88 0.68 0.82 3.31
Revenue has grown just over 4% annually from 2005-2010. Again, not impressive, and has slowed since 2007.
Revenue (Million $)
1Q 2Q 3Q 4Q Year
2010 4,835 4,857 4,979 5,075 19,746
2009 4,493 4,727 4,913 4,982 19,115
2008 4,813 5,006 4,998 4,598 19,415
2007 4,385 4,502 4,621 4,758 18,266
2006 4,068 4,161 4,210 4,307 16,747
2005 3,906 3,987 4,001 4,009 15,903
What about dividend growth? This is the kind of stuff that makes my heart tick, but if growth in earnings and revenue have only averaged 4-5% over the last 5 years it does leave us questioning how sustainable dividend growth is. Dividend growth has averaged 7.7% annually over the last 5 years. That is a little higher than both revenue and earnings growth, which usually leads to higher payout ratios. The current payout ratio is somewhere around 63%, depending on which EPS figures you are going by. That is exceptionally high and dividend growth must either slow rapidly or earnings must increase dramatically to get this payout ratio lower. I generally prefer payout ratios under 50%, except in few cases.
Dividends Per Year ($ Per Share)
2010 2.64
2009 2.40
2008 2.32
2007 2.12
2006 1.96
2005 1.80
The lack of earnings growth over the last few years is concerning, as is the general rise in commodity prices that is going to affect the bottom line at KMB. In response to rising commodity prices KMB has decided to raise prices, which shouldn’t really be a surprise to anyone. I see this in two ways. On the positive side, it leads to healthier margins. On the negative side, consumers are still fighting their way out of a nasty recession and higher prices could lead consumers to store-brand products or other competitors. Overall, I like this move. This company has to increase margins to move forward.
I do like this company. I’m not sure if I love at current prices. It’s current P/E ratio is at 14.75 and it’s entry yield right now is at 4.32%. It’s a very healthy entry yield, but one that an investor would demand in the face of possible slowing dividend growth. I think I would wait for a dip in the price on KMB before initiating a position. I think it’s a solid defensive play, and it could be due for a spring in earnings and revenue if management navigates the current waters appropriately. I’m patiently waiting on the sidelines when it comes to initiating a position with Kimberly-Clark.
What about you?
Thanks for reading.
KMB has recently cut estimates for this year. One should expect dividend growth to be slowed unless KMB management could afford a temporary rise in payout. Nevertheless the question that worries me is how wide is the economic moat of KMB. Kleenex, huggies, scottex, is just paper that ends on the garbage, it will be the first thing I’ll flip to more economic brands.
I agree. How wide is the moat? It’s a good question, and something I touched on at the end when I talk about consumers switching to store-brand products. Paper is paper. It’s not like Coca-Cola where there is a brand loyalty and taste difference. I’m on the sidelines with KMB. If it was to drop below $60 I might think about it, but I think the price is a little inflated right now.
Good stuff. There is no denying they have great brands, but slowing growth is always a concerning trend.
I agree Pig.
Great brands, but how loyal are the buyers when times get tough. I think the slowing growth may have answered that question a little.
In spite of rising commodity prices Kimberly-Clark has managed to continue to increase their profitability. One of the factors keeping inflation in check is the ability of many large firms like Kimberly clark to continually increase productivity