Kimberly-Clark: Re-Inventing Consistency


Consumer staple companies are something that every income portfolio should have. They provide necessary products that the common consumer has come to value. The consumer has even become dependent on certain items and cannot imagine living without them. One such company has been delivering solid earnings for a long time with a large offering of many name brand products you are probably familiar with. Kimberly-Clark (NYSE:KMB) is a consumer staple company that makes many well known products. Among those products are brand name items such as: Kleenex, Scott, Andrex, Huggies, Pull-Ups, Kotex and Poise.

I have been considering adding Kimberly-Clark to my dividend income portfolio for some time. When I compare it to other dividend income stocks, it continues to lose during my fundamental comparison. It is for that reason I decided to do a stand-alone analysis of Kimberly-Clark. I wanted to analyze whether the company's financial situation could stand on its own when not compared to other companies. Since Kimberly-Clark just released its full-year earnings report for 2012, I figured now was as good a time as any to do my analysis.

First let's take a look at a few of the highlights from Kimberly-Clark's earnings report.

2012 Earnings Highlights

  1. Fourth quarter 2012 net sales of $5.3 billion increased 3 percent compared to the year-ago period.

  2. Fourth quarter adjusted earnings per share were $1.37 in 2012 compared to $1.28 in the prior year.

  3. Full-year diluted net income per share was $4.42 in 2012 and $3.99 in 2011.

  4. Full-year adjusted earnings per share were $5.25 in 2012 compared to $4.80 in 2011 and the company's previous guidance of $5.15 to $5.25.

  5. Share repurchases are anticipated to total $1.0 to $1.2 billion in 2013.

  6. The company expects to increase its dividend at a high-single digit rate effective April 2013. This will represent the company's 41st consecutive annual increase in the dividend.

2013 Projected Headwinds

  1. Lost sales as a result of European strategic changes and pulp and tissue restructuring actions are expected to reduce sales volumes by 2 percent.

  2. Currency rates are expected to decrease sales by 0 to 1 percent.

  3. Inflation in key cost inputs of $150 to $250 million, primarily due to higher pulp, recycled fiber and distribution costs.

Note: KMB just recently decided to cut its ties with the European markets. It has had a rather difficult time profiting from those markets.

Past Performance

Now that we have seen some of Kimberly-Clark's statements about its year 2012 performance and anticipated 2013 problems, let's look back at its performance over time.

  • Share Price: Over the last 10 years, we have seen KMB increase its share price from around $45 a share in 2003 to over $85 per share in 2013. This is an 88% increase in share price over a 10-year span.

  • Dividend: Kimberly-Clark has increased its dividend payout from $0.34 per share quarterly in 2003 to $0.74 per share quarterly at the end of 2012. This is 117% increase in dividend payout over a 10-year period, and it expects to increase its payout again this year.

These are great numbers for a dividend income stock over a 10-year time frame. It is returning value to investors just as it should. When you look at its recent numbers over the last five years, you start to see a slightly different picture. Diluted earnings per share has only increased 10% per share from $4.04 per share in 2008 to $4.42 per share in 2012. More than half of that increase can be attributed solely to share repurchase plans which have reduced the number of outstanding shares by 5% over that same time. Over this same time period, its dividend payout has increased 27% from $2.32 annualized to $2.96 annualized. This has caused Kimberly-Clark's dividend coverage ratio to shrink raising questions of where the growth will come from if it expects to continue raising dividends. One of the largest drags on its performance has been the European market. It addressed this specific issue with a statement in its latest earnings report.

European Restructuring

I always find it quite refreshing when management admits to mistakes or failures and take paths to resolve these issues. For Kimberly-Clark that mistake has been Europe. Profiting from the European markets has been rather difficult for them. Profits have not grown the way the management had originally anticipated. These sub-par results have had a drag on its performance for some time now. In its fourth quarter earnings statement, it addressed a restructuring of its European strategy. Here is a portion of that statement which can be found in its latest earnings statement.

In October of 2012, the company decided to make strategic changes in its Western and Central European businesses in order to improve underlying profitability and to focus the company's resources and investments on its strongest market positions and growth opportunities that can deliver more sustainable returns. These changes include the exit of the diaper category in Western and Central Europe, with the exception of the Italian market, and the divestiture or exit of some lower-margin businesses in certain markets, mostly in the consumer tissue segment. To align its cost structure with these strategic decisions, the company will streamline its European manufacturing footprint and administrative organization.

Restructuring costs for these actions will be incurred through 2014 and are expected to total $250 to $350 million after tax ($300 to $400 million pre-tax). Cash costs are projected to be approximately 50 to 60 percent of the total charges. These estimates are unchanged from the projections announced in October 2012. The businesses that will be exited or divested generate annual net sales of approximately $500 million and negligible operating profit. Fourth quarter 2012 restructuring costs were $242 million after tax ($299 million pre-tax).

Summary: I appreciate a company's willingness to change market strategies. This demonstrates an understanding that sometimes it's best to cut your losses and move on. Many companies continue to bash against a brick wall hoping it will break. Kimberly-Clark has decided to focus on its growing markets in 2013 and restructure lagging markets. This combination of strategies coupled with 1 to 1.2 billion dollars in share repurchases has Kimberly-Clark on the path for a better 2013. I still believe there are better companies to own other than Kimberly-Clark. If you like the product line that it offers and believe in management, I do not see any reason that you should not own this stock. All information used in this article can be found earnings statement.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.