By: Ahmed Ishtiaq
Kimberly-Clark (KMB) is one of the world's largest makers of personal paper products. The company operates through four business segments: personal care, consumer tissue, K-C Professional, and health care. Kimberly-Clark's largest unit, personal care, makes products such as diapers (Huggies, Pull-Ups), feminine care items (Kotex), and incontinence care products (Poise, Depend). Through its consumer tissue segment, the manufacturer offers facial and bathroom tissues, paper towels, and other household items under the names Cottonelle, Kleenex, Viva, and Scott (including the Scott Naturals line). Kimberly-Clark's professional unit makes WypAll commercial wipes, among other items.
Kimberly-Clark is one of the best dividend payers in the market. The company pays an annual dividend of $3.24 per share. Recently, the company announced a 9.5% increase in its quarterly dividend payments, which took the per share quarterly dividend to $0.81 per share. At the moment, Kimberly-Clark offers a dividend yield of 3.4%. Current payout ratio for the company stands at around 53%, which is easily manageable. The company paid $1.15 billion in dividends and generated $2.19 billion in free cash flows over the past twelve months. I decided to use my free cash flows model in order to check the strength of the free cash flows and some debt metrics of the company.
Free Cash Flows
Free Cash Flows
Depreciation and other noncash charges
Funds from Operations (FFO)
change in noncash current assets
change in noncash current liabilities
Operating Cash flows
Free Operating Cash Flow
Source: SEC Filings
In the previous three years, the company has experienced some volatility in its net income. Especially in 2011 the net income went down substantially. The same pattern is evident in funds from operations of the company, and the end of 2012 FFO stood at $2.6 billion, compared to $2.7 billion at the end of 2010. The cash flows from operations stood at significantly improved levels in 2012 as compared to 2010. Kimberly-Clark also invests a substantial amount of capital in the business, and in the previous three years, the amount of capital expenditures has remained around $1 billion.
At the end of 2010, the firm spent $964 million in capital expenditures; however, by the end of 2012 the capital expenditures for Kimberly-Clark had gone up to $1.093 billion. The company generates healthy free cash flows. Although, the capital expenditures have been increasing the firm has been able to post impressive free cash flows. Kimberly-Clark free cash flows look in solid condition at the moment, and there has been an impressive growth over the past three years.
Funds from Operations(FFO)/Total Debt
FFO/Capital spending requirements
Free Operating Cash Flow + interest expense/ Interest expense
Debt Service coverage
For my analysis, I have used four ratios. First ratio indicates that the debt of the company is adequately covered with the FFO. The ratio has been fairly stable over the past three years, indicating a strong coverage pattern for the company. In addition, the firm is generating enough cash flows to cover the long term debt. The second metric indicates that one of the most important components of the firm is easily covered with the FFO of the company. As I mentioned, capital expenditures are an integral cash outflow for Kimberly-Clark, and the analysis shows that the firm is able to meet its capital spending requirements through its internally generated funds.
Last two metrics in the table indicate that the firm is able to meet its interest and debt payments sufficiently. Interest coverage is extremely strong for the company, and it should not face any trouble paying its interest obligations. Furthermore, debt service coverage is also covered with cash flows. Debt service coverage for the past twelve months has come down due to an increase in the short-term debt. Overall, the solvency position of the company is solid.
Kimberly-Clark deals in a stable market and the company has a solid position in the market. Revenues for KMB have been growing at a steady pace over the past five years. As a result, the company has been able to post impressive results. Kimberly-Clark generates impressive cash flows as my analysis shows above, which means the company can reward its investors through cash dividends. The payout ratio is also low for the company, which gives it room to further increase dividends in the future. Kimberly-Clark would be a smart choice to add to the income portfolio due to its solid market position and strong cash flows.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.