Last week I wrote this article and argued why Kimberly-Clark (NYSE:KMB) is a good long-term investment. Today the company announced it is pursuing a spin-off of their entire healthcare business. The press release came as a positive surprise for investors and Kimberly-Clark's shares are trading 2 percent higher at $112 a share. In this article I will discuss whether the spin-off announcement changed my short and long-term opinion regarding Kimberly-Clark's shares.
Kimberly-Clark announced it is pursuing a spin-off of their entire healthcare division. The division sells surgical and infection-prevention products for operating rooms and several medical devices. According to Kimberly-Clark's third quarter earnings, the healthcare division accounted for 7.6 percent of total revenues and 7.0 percent of total operating profit over the first three quarters of 2013. Full year revenues will be around $1.6 billion and full year operating profit will be around $225 million. Kimberly-Clark stated the transaction will most likely be completed in the third quarter of next year, if a spin-off were to occur. The company gave no indication about the targeted price for the healthcare division.
As I mentioned in my previous article, Kimberly-Clark is a company in transition. The company divests businesses which deliver low growth and profitability. The announced spin-off is completely in line with the company's strategy. Over the first three quarters this year, the healthcare division reported 0.9 percent decrease in revenues and the operating profit was flat compared to the first three months of 2012. This makes the division the worst performing business of Kimberly-Clark this year.
Considering Kimberly-Clark's long-term strategy, a spin-off of the entire healthcare division does make sense. Further, a spin-off will strengthen the company's financial position. This is positive news for investors who are looking for stable dividend income, because a stronger financial position ensures investors that the company will be able to continuously raise dividend payments in the future. So, my long-term perspective regarding Kimberly-Clark's shares is still very positive.
Despite being a 'boring stock', Kimberly-Clark shares surged over 16 percent over the past month (see graph below). The return is based on the current pre-market share price. I bought my Kimberly-Clark shares at $93.78 on October 2, 2013. My current total return is 19.7 percent. When I bought the shares in October I did not expect such return in just a month time, because Kimberly-Clark is usually not a volatile stock. Now I ask myself: should I take my current profits or hold on?
Despite the current increase of the company's share price, the dividend return is still 2.90 percent. The yield is in line with the yield of the main competitor, Procter & Gamble Company (NYSE:PG). Other competitors like Colgate-Palmolive (NYSE:CL) and Energizer Holdings (NYSE:ENR) offer less dividend return (yield between 2.00 and 2.10 percent). Further, Kimberly-Clark's share buyback program will support demand for the company's shares in the upcoming years.
Although Kimberly-Clark did not provide an indication for the targeted price of the spin-off, I trust management to get the shareholders a good price for the healthcare division. The company's split-off their worst performing division. This will strengthen the financial position in the long run. I expect Kimberly-Clark will raise the quarterly dividend payments by another 10 percent, if the spin-off were to occur in 2014. This makes the dividend yield even more attractive as it is right now.
Third quarter earnings also proved the company's strategy to leave low growth and low profitable markets and focus on fast growing and high profitable emerging markets is working. The spin-off of the healthcare division will not conflict with the company's strategy, because the healthcare division performed the worst of all the company's divisions in terms of growth and profitability this year.
All above arguments combined I still believe Kimberly-Clark is worth to invest in and I decided to hold on to my shares. I am looking forward to the final spin-off decision and would like to see management provide a target price for the healthcare division.