Kimberly-Clark for the Long Run

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 |  About: Kimberly-Clark Corporation (KMB), Includes: AEP, CL, CLX, ED, LO, MO, PG, SPY, T
by: World's Best Stocks

According to the press release of July 23, 2010 related to the Q2 2010 earnings of the company, Kimberly-Clark Corporation (NYSE:KMB) expects EPS for the fiscal year 2010 in a range of $4.57 to $4.77. We take this opportunity to analyze the past of KMB in order to figure where the value of the stock could be in 10 years.

KMB the Corporation is a global company focused on a better life through product innovation and building its personal care, consumer tissue, K-C Professional & Other and health care brands. The Corporation is principally engaged in the manufacturing and marketing of a wide range of essential products to improve people's day-to-day lives around the world.

At $65.03, KMB is trading at 11.22% from its all-time high of $73.25 reached on December 4, 2000. Approximately 10 years after the stock hit its all-time high, it’s still possible to invest in the stock at an 11% discount from that top. In a more recent past, the stock reached another peak of $72.79 on June 5, 2007, meaning the stock is trading today at 10.66% from that level.

KMB is not a volatile stock. A non-volatile stock doesn’t necessarily mean bad returns for the investor and/or no enrichment. The volatility of KMB is measured by its beta ratio of only 0.44, which signifies that the stock has a theoretical volatility 56% lower than the market.

We compared the return of KMB with the market (NYSEARCA:SPY) from the years 1994 to 2010 YTD (as of October 1). All paid dividends are included in the return but not the 2 spin-offs made by KMB over that period.

Civil year

Kimberly-Clark Corporation

Market (SPY)

1994

4,18%

0.33%

1995

73.13%

37.71%

1996

20.17%

22.35%

1997

7.65%

33.35%

1998

14.94%

28.49%

1999

24.26%

20.32%

2000

10.32%

-9.70%

2001

-13.84%

-11.78%

2002

-18.65%

-21.54%

2003

27.26%

27.88%

2004

13.98%

10.54%

2005

-6.70%

4.70%

2006

17.13%

15.61%

2007

5.11%

5.16%

2008

-20.67%

-36.38%

2009

25.31%

26.05%

2010 (as of October 1)

5.09%

4.28%

Click to enlarge

An investment made in KMB on December 31, 1993 had a return of 298.95% on October 1, 2010, while an investment in the market (SPY), for that same period, had a return of 210.23%. If we look at the last 10 years, an investment made in KMB on December 31, 1999 had a return of 28.47% on October 1, 2010, while an investment in the market, for that same period, had a return of -7.12%. Again, all the paid dividends are included in these returns but not the 2 spin-offs made by KMB.

As you can see, over the 17 periods observed, KMB outperformed the market 6 times. Despite the fact that KMB and the market are far from having the same theoretical volatility, they had similar return per year (+/- 3%) 8 times over 17 periods. KMB underperformed the market only 3 times.

Let’s have a look at the past EPS, dividend per share and payout ratio of KMB in the first table and at the dividend growth in the second one. (All amounts are split adjusted for the 2-for-1 stock split of April 3, 1997 and the 2-for-1 stock split of January 3, 1992)

Year

Diluted EPS

Dividend per share

Payout Ratio

1991

$0.79

$0.725

91.77%

1992

$0.27

$0.82

303.70%

1993

$0.42

$0.84

200.00%

1994

$1.36

$0.875

64.34%

1995

$0.06

$0.895

1491.67%

1996

$2.48

$0.915

36.90%

1997

$1.61

$0.95

59.01%

1998

$2.11

$0.99

46.92%

1999

$3.11

$1.03

33.12%

2000

$3.31

$1.07

32.33%

2001

$3.05

$1.11

36.39%

2002

$3.22

$1.18

36.65%

2003

$3.33

$1.32

39.64%

2004

$3.61

$1.54

42.66%

2005

$3.28

$1.75

53.35%

2006

$3.25

$1.92

59.08%

2007

$4.09

$2.08

50.86%

2008

$4.04

$2.27

56.19%

2009

$4.52

$2.38

52.65%

2010

$4.67 (estimated)

$2.58

53.73% (TTM)

Click to enlarge

Year

Dividend growth

1991 to 1992

13.10%

1992 to 1993

2.44%

1993 to 1994

4.17%

1994 to 1995

2.29%

1995 to 1996

2.23%

1996 to 1997

3.83%

1997 to 1998

4.21%

1998 to 1999

4.04%

1999 to 2000

3.88%

2000 to 2001

3.74%

2001 to 2002

6.31%

2002 to 2003

11.86%

2003 to 2004

16.67%

2004 to 2005

13.64%

2005 to 2006

9.71%

2006 to 2007

8.33%

2007 to 2008

9.13%

2008 to 2009

4.85%

2009 to 2010

8.40%

Click to enlarge

The 2010 estimated EPS of $4.67 reflects the middle of the guidance of the company for the full year, which is $4.57 to $4.77 per share, after adjustments for the one-time charge related to adoption of highly inflationary accounting in Venezuela.

From 1996 to 2010 (2010 estimated), the compound annual growth rate was 4.62% for the company’s EPS. If we take 1991 as a starting year, the company increased its dividend each year since 1991. The compound annual growth rate of dividend of KMB has been 6.91% from 1991 to 2010 and in a more recent past, 8.70% from 1999 to 2010, which is excellent.

The average payout ratio for the years 1996 to 2010 has been 45.97%. We can clearly see an uptrend in the payout ratio of the company, which matches the fact that the company increased its dividend at a higher rate than its EPS growth rate over the last 10 years. At this rhythm, the payout should continue to increase.

With an annual dividend of $2.64, a TTM EPS of $4.69, a payout ratio of 53.73%, the company has flexibility to increase the dividend and this one is safe. The current yield of KMB is 4.06% while the current yield of the market is 1.92%.

As investors, it’s important to select companies with rising dividends and rising EPS to profit from a rising share price. Moreover, it’s important to select companies that increase their sales year over year to ensure their long term potential growth. Here are the Kimberly-Clark Corporation’s sales by year from 1991 to 2009. We have also included 2010 TTM.

Year

Sales

1991

$11,627,900,000

1992

$12,024,200,000

1993

$11,646,800,000

1994

$11,979,200,000

1995

$13,788,600,000

1996

$13,149,100,000

1997

$12,546,600,000

1998

$12,297,800,000

1999

$13,006,800,000

2000

$13,982,000,000

2001

$14,524,400,000

2002

$13,566,300,000

2003

$14,348,000,000

2004

$15,083,200,000

2005

$15,902,600,000

2006

$16,746,900,000

2007

$18,266,000,000

2008

$19,415,000,000

2009

$19,115,000,000

2010 TTM

$19,587,000,000

Click to enlarge

The compound annual growth rate of the sales of KMB has been 2.80% over the period 1991-2009. This is not an impressive annual growth rate but if we analyze the sales by geographic area since 1995, we can clearly see an encouraging trend: The proportion of the sales of KMB coming from foreign markets increased over time comparing to the sales coming from US & Canada. In 1995, the sales from foreign markets accounted for 28.89% of the total sales of the company, while in 2009, the sales from foreign markets accounted for 45.49% of the total sales. The company will profit from the growing emerging markets.

Here, you will find a table of Kimberly-Clark Corporation’s sales by geographic area.

Geographic Area

2009

2005

2000

1995

North America (US & Canada)

54.51%

58.83%

67.06%

71.11%

Europe, Asia, Latin America & Other

45.49%

41.17%

32.94%

28.89%

Click to enlarge

Let’s have a look at the historic P/E of KMB.

Year

P/E at year-end

1991

25.97

1992

91.09

1993

53.25

1994

16.49

1995

632.17

1996

18.01

1997

29.27

1998

25.20

1999

20.92

2000

21.36

2001

19.61

2002

14.74

2003

17.74

2004

18.23

2005

18.19

2006

20.91

2007

16.95

2008

13.05

2009

14.10

2010 YTD

13.87 (TTM)

Click to enlarge

The current TTM P/E of KMB is 13.87. Over the period 1996-2010 YTD, we have 15 periods of P/E with an average of 18.81. We can clearly see over the period that the P/E of KMB is not necessarily constant and the trend is downwards. The actual TTM P/E is well below the average of 18.81 but it is not a sign that the stock is cheap because the company has evolved in the past decade to become a more mature company that focuses on the dividend payments for its shareholders. Usually, income stocks have lower P/E than growth stocks.

For the measure of the profitability, KMB has a TTM profit margin of 10.56%. The TTM operating margin is 15.13%. By comparison, the average TTM profit margin and TTM operating margin for the Household & Personal Products industry (4 companies compared; KMB, CL, PG, and CLX) are 12.30% and 18.98% respectively. KMB is below the industry.

For the measure of the financial strength, the MRQ current ratio is 1.03 for KMB. The company has a MRQ debt/equity ratio of 1.12. The average MRQ current ratio of the Household & Personal Products industry (4 companies compared; KMB, CL, PG, and CLX) is 0.94. KMB is above.

The better way to predict the future is to look at the past; this is why we analyzed the past of KMB. Now, we will use the past to extrapolate what would be the return in 10 years of an investment made in KMB today.

We previously saw that from 1996 to 2010 (2010 estimated), the compound annual growth rate has been 4.62% for the company’s EPS. The compound annual growth rate for the company’s dividend has been 6.91% from 1991 to 2010. In a more recent past, the compound annual growth rate for the company’s dividend has been 8.70% for the period 1999-2010. For our scenario, let’s presume that the company will grow its EPS by 4% and continue to increase its dividend by 7% per year in the next 10 years.

Year

Estimated EPS (growth of 4%)

Estimated dividend (growth of 7%)

2010

$4.67 (estimated)

$2.58 (already paid)

2011

$4.86

$2.76

2012

$5.05

$2.95

2013

$5.25

$3.16

2014

$5.46

$3.38

2015

$5.68

$3.62

2016

$5.91

$3.87

2017

$6.14

$4.14

2018

$6.39

$4.43

2019

$6.65

$4.74

2020

$6.91

$5.08

Click to enlarge

The investor who invests in KMB could pocket an estimated income of dividend of $38.13 until December 31, 2020 assuming a 7% growth of the dividend of the company per year. Here are 2 possibilities of the value of the stock price at the end of 2020, assuming different P/E ratios based on an EPS growth of 4% per year and an investment in KMB based on the current price of $65.03.

With a P/E of 12: EPS of $6.91 X 12=$82.92;

Return: 86.14% (paid dividends included) (Compound annual return of 6.41%)

With a P/E of 14: EPS of $6.91 X 14=$96.74;

Return: 107.40% (paid dividends included) (Compound annual return of 7.56%)

Based on a dividend in 2020 of $5.08 and an EPS of $6.91, that would give the company a payout ratio of 73.52% and a yield of 5.25% to 6.13%, assuming our 2 P/E scenarios of 14 and 12 (stock price in 2020 of $96.74 or $82.92).

In order to justify our valuation scenarios, we analyzed today’s 5 mature companies with high payout ratios to check if their current P/E and their current yield match our future expectations for the valuation of KMB.

Company

Payout Ratio

P/E TTM (As of October 1, 2010)

Yield (As of October 1, 2010)

AT&T, Inc. (NYSE:T)

77.21%

13.40

5.83%

American Electric Power Co., Inc. (NYSE:AEP)

68.18%

14.97

4.64%

Consolidated Edison, Inc. (NYSE:ED)

70.12%

14.30

4.92%

Altria Group, Inc. (NYSE:MO)

83.13%

14.33

6.39%

Lorillard, Inc. (NYSE:LO)

64.62%

12.93

5.62%

Click to enlarge

Even if these companies are mature, they have current P/E in the range of 13 to 15, and current yield between 4.64% and 6.39%. After this analysis, we feel comfortable with our scenarios of P/E between 12 and 14, even if the company has a high payout in the future.

The fundamentals of the company are all great: low volatility, the stock is trading at 11.22% from its all time high of $73.25, excellent past return of the stock compared to the market, current yield at 4.06%, safe and rising dividend, growing EPS at anticipated records levels, growing sales on a long period with a higher proportion coming from foreign markets and finally, correct P/E.

Moreover, assuming our scenario of the growth rate of the company’s EPS and dividend for the coming years, the potential return would be in the range of 86.14% to 107.40% by the end of 2020 (compound annual return of 6.41% to 7.56%). Finally, assuming an annual dividend of $5.08 in 2020, the yield of the investor who invested in the stock at $65.03 would be 7.81% at that moment and should continue to increase over time: that is the reward of long term investing.

Participating in the revenues of companies who surround us in our everyday lifestyle is an excellent investing philosophy, and KMB is an excellent option in that matter.

Source for industry group and company description: Morningstar, Inc.

Disclosure: Long KMB and SPY