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Summary

  • The company plans to spin-off their healthcare division by late 2014 to enhance shareholder value.
  • The company is a leader in most markets that they participate in.
  • The company has a long history of yearly dividend increases and share repurchases to reward investors.

Kimberly-Clark (NYSE:KMB) is a company that is entering an exciting period. After acquiring some businesses and divesting others over recent years, the company has decided to spin-off its healthcare division. The company currently yields about 3.2 percent and has a long history of yearly dividend increases. While no stock should be considered a "safe stock" without any risk, KMB shares are relatively safe in comparison to many high profile stocks and should be strongly considered as a building block of any long-term investors' portfolio. KMB's shares, however, are historically expensive and investors should wait for a moderate pullback in the share price before establishing a full position. With the spin-off of KMB's healthcare division approaching in late 2014, investors will be able to hold shares in 2 high-quality companies.

Background

KMB sells consumer and other products in more than 150 countries. The company's business has the following four divisions: 1) personal care (45 percent of sales and 48 percent of operating profits in 2013); 2) consumer tissue (31 percent of sales and 28 percent of operating profits in 2013); 3) K-C professional and other (16 percent of sales and 17 percent of operating profits in 2013); and health care (8 percent of sales and 7 percent of operating profits in 2013). In 2013, sales by geographic region were: North America, 49 percent; Europe, 14 percent; and Asia, Latin America and others, 37 percent.

The personal care division sells disposable diapers, training and youth pants, swim pants, baby wipes, feminine and incontinence care products. The consumer tissue division sells facial and bathroom tissue, paper towels, napkins, and related products. The K-C professional division sells apparel, wipers, soaps, sanitizers, tissues, and towels. The health care division sells surgical and infection prevention products for the operating room; and a portfolio of medical devices focused on pain management, respiratory, and digestive health. The company sells their products directly to supermarkets, mass merchandisers, drugstores, warehouse clubs, variety and department stores, and other retail outlets, as well as through other distributors and e-commerce. The company also sells products for away-from-home use through distributors and directly to manufacturing, lodging, office building, food service, health care establishments, and public facilities.

Second-quarter earnings

KMB announced adjusted earnings of $1.49 per share for the second quarter of 2014. Earnings increased due to organic sales growth, cost savings and a lower share count from share buybacks, which made up for increased input costs, currency issues and lower net income from equity companies. KMB reported sales of $5.343 billion, up 1 percent from the prior-year quarter. Foreign currency issues, lost sales relating to changes in European strategies and restructuring actions offset improved sales volumes and higher selling prices. Excluding the offsetting issues, organic sales grew 5 percent from the prior-year quarter, which includes a 10 percent increase in K-C international division sales. Adjusted operating profits grew 5 percent to $860 million in the second quarter. Results for each division were as follows: 1) Personal care division: sales increased 2 percent from the year ago quarter to $2.4 billion due to organic sales volume growth of 5 percent and a 3 percent increase in net selling prices. Personal care operating profit increased 5 percent from the year ago quarter to $453 million. 2) Consumer tissue division sales increased 1 percent to $1.6 billion due to higher sales volume and increase in net selling prices. Consumer tissue division's operating profit increased 9 percent to $240 million. 3) K-C Professional division and other's sales increased 2 percent from the year ago quarter to $0.9 billion due to positive sales volumes. K-C Professional and other's operating profit decreased 4 percent to $154 million. And 4) health care division sales decreased 1 percent to $0.4 billion due to currency issues and unfavorable product mix, as both medical device volumes and surgical and infection prevention volumes were flat from the year ago quarter. Health care operating profit was $63 million, up 17 percent from the prior year quarter due to lower marketing, research and general spending and cost savings. The CEO of KMB summarized the quarter and near-term outlook for the company as follows:

"Compared to our previous guidance, we've narrowed the range modestly by bringing down the top end by $0.05 a share. This recognizes a slightly more difficult external environment including the outlook for commodities and business conditions for K-C to Mexico, some of the consumer tissue promotion activity in North America and overall competitive activity in general. Regardless of the environment we continue to be optimistic about our future. We're staying focused on our strategies to protect and improve our brands and our business and we remain convinced that successful execution of our global business plan will continue to result in strong returns to our shareholders."

KMB narrowed their guidance for full-year 2014 adjusted earnings and now expects adjusted earnings in the range of $6.00 to $6.15 per share, compared with their prior guidance range of $6.00 to $6.20 for 2014.

Competitors

Companies in the household products sector manufacture and sell non-durable consumer goods such as cleaning products, detergents, disinfectants, brooms, mops, towels, rags, disposable plates, and cutlery. The industry is mature, slow-growing, and price competitive. Major competitors include Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL), Clorox (NYSE:CLX), and Energizer (NYSE:ENR). Demand in the industry depends on population growth and consumer preferences. Individual company profits depend on product innovation, effective sales and marketing, and efficient operations. Large companies have size advantages in purchasing, manufacturing, distribution, and marketing, and smaller companies compete using specialization and niche product offerings. The industry has experienced slow growth and intense competition over the years in established markets. Increasing retail consolidation in developed markets has also pressured prices for various manufacturers.

Upcoming spin-off of healthcare business Halyard Health

In November 2013, KMB announced that the company would pursue a tax-free spin-off of the company's health care business. Such a spin-off would create a stand-alone, publicly traded health care company with about $1.6 billion in annual net sales and leading market positions in both surgical and infection prevention products and medical devices. Since that time, KMB stated the new spin-off company will be called Halyard Health, Inc. and will be headquartered in Georgia. The CEO of KMB stated that: "When the spin-off is completed, Halyard Health will be able to take advantage of its leading positions in several key categories to drive its performance and pursue its own opportunities. This move will also allow Kimberly-Clark to further sharpen our focus on growing our consumer and K-C Professional brands around the world." Halyard Health will focus "… on advancing the health of patients and our industry by delivering clinically-superior solutions for preventing infection, eliminating pain and speeding recovery." The new company has leading market positions in both surgical and infection prevention products and medical devices and employs about 16,500 employees.

The spin-off is expected to take the form of a tax-free distribution of 100 percent of Halyard Health's common stock to KMB shareholders, with the distribution ratio to be determined shortly before the spin-off occurs. The company expects distribution to be completed at the end of the third quarter or potentially in the fourth quarter of 2014. KMB will receive a cash distribution from Halyard Health prior to the spin-off in an amount to be determined and will use the cash to repurchase its common stock.

Analysts approve of the spin-off as KMB's healthcare business has been very volatile for years, and analysts questioned whether KMB knew how to run the business well. KMB's healthcare business is the smallest, and analysts feel it is the least compelling part of KMB's business. Generally, the weak economy has significantly pressured medical product manufacturers, as fewer patients have sought medical treatment, reducing demand for supplies and forcing hospitals to push vendors on prices.

Analysts' views and our views

Analysts appreciate KMB's strong brand portfolio, their history of innovation and their cost savings program, all of which help the company to offset higher input costs and unfavorable currency issues in the second quarter of 2014. Analysts note, however, KMB's almost flat sales signal weakness in the overall consumer-spending environment due to slow job growth. The company also remains exposed to unfavorable foreign currency fluctuations as they have a significant international presence. Persistent weak economic conditions in Europe also adversely affect KMB.

Analysts believe that long-term sales growth will result from KMB's expansion into non-traditional categories, the company's focus on emerging markets, as well as innovation that will allow the company to raise prices. Analysts believe, however, that slow economic growth and unfavorable demographics, such as low birth rates, will result in intense competition and could inhibit growth of the company's baby care businesses. Analysts believe that KMB shares are expensive given a high forward price to earnings ratio that is at a peak price to earnings multiple in a historical context for the company. A majority of analysts have a "hold" rating for KMB shares with price targets ranging from $110 to $118. Finally, KMB will reduce their average share count in 2014 by 2.5 percent through stock repurchases.

We generally agree with analysts' conclusions regarding KMB's shares. The current price to earnings ratio for KMB shares is about 19.5 and the shares yield 3.2 percent. In addition, the company has a long history of substantially raising their dividends in addition to the company's substantial share buyback activity. KMB's forward price to earnings ratio is 16.65 based on 2015 earnings estimates of $6.53. We should note that KMB's price to earnings ratio in the previous 10 years has ranged from 10.4 to 19. That said, with overall markets at or near record highs, an investor should wait for KMB's share price to pull back to a range of $98.0 to $104.50 to establish a full position (A forward price to earnings ratio in the range of 15 to 16). Finally, we should note that KMB's shares have seen extensive insider selling with no purchases in recent years.

Source: Kimberly-Clark: A Spin-Off Play And Increasing Dividends