There has been much said in the media about the benefits of “boring” companies that pay large dividends and have a lengthy history of boosting their payouts. Many commentators and advisors suggest putting money in such high-yielding stocks. Perhaps this is just the current market fad, but I do think there is a lot of weight behind such a statement. For this article, let’s take a closer look at Kimberly-Clark (NYSE:KMB)- a dividend aristocrat.
First, let’s examine the yields on 10-year and 30-year Treasuries. As I write, the 10-year bond is yielding 3.12%, and the 30-year is at 4.38%. That is to say, the U.S. government will pay me slightly less than $44 for every $1000 I lend to them for 30 years. That is hardly an appealing proposition, and quite awful if you consider the average annual inflation rate of 2.56% over the past decade (2000-2009). [However, do note that U.S. Treasuries are considered the least risky investments, backed by the full faith and credit of the U.S., and therefore, command a certain “risk-free” premium in terms of yield pricing.]
Fortunately, for investors, there are many alternatives to Treasury bonds, such as dividend-growth stocks; and in particular, Kimberly-Clark. The company currently pays a 4.2% dividend, which beats out the 10-year and is comparable to the 30-year, when comparing yields. There is, however, a very important difference: Kimberly-Clark has been increasing the dividend by an average rate of 9%, annually, over the past 10 years. This dividend growth rate allows the stock’s yield to keep up with and exceed the pace of inflation, preserving the purchasing power of cash payouts.
There is, of course, the other part of the story. Treasury bonds are generally considered “risk-free” (credit risk), so you can reasonably assume that upon maturity, your principal investment will be returned to you. Equity prices, however, will always fluctuate (sometimes violently so), and there is no guarantee that you can sell your position at or above the price you purchased. So, let’s push aside the dividend story and turn to Kimberly-Clark, the company and the stock.
Kimberly-Clark is a leading player in the global health and hygiene category selling bathroom tissues, diapers, feminine products, and paper towels. Its brands include Kleenex, Scott, Huggies, Pull-Ups, and Kotex. Kimberly sells its products directly and distributes them through supermarkets, mass merchandisers, and drugstores, among other outlets. Sales generated outside of North America account for about 45% of the firm's consolidated sales base. The company is the epitome of a consumer staple, and it holds the number 1 or number 2 share positions in more than 80 countries; and, as an equity investment, is a much less volatile stock and generally considered as a safe and stable name.
Currently, KMB is trading at 13x forward earnings- compared with forward P/E’s of 15x for Proctor & Gamble (NYSE:PG), 16x for Colgate (NYSE:CL), and 17x for Clorox (NYSE:CLX). The company has provided shareholders with a high rate of return on equity, averaging 31% over the past 10 years. Though, during the Q1 FY11 earnings release, the company forecast net sales to grow at 4-6%, vs 2-4% previous guidance, KMB also expects higher input cost inflation and has adjusted the bottom range EPS for FY11 from $4.90 to $4.80. Management is responding to the higher input costs by raising selling prices across a number of businesses, accelerating or implementing additional FORCE cost savings programs, and aggressively managing overhead spending. Kimberly-Clark, which has held or increased market share in 7 of 8 key consumer categories, continues to follow through on their Global Business Plan, which among other things, targets sales growth for 3-5% and EPS growth in the mid-to-high single digits.
The bottom line: An investment in Kimberly-Clark over the next 10 years will likely provide not only substantially higher amount of income than Treasuries, but also a greater total return- with significantly less risk than other equity investments. Ten years from now, I expect that Kimberly-Clark will still be making Kleenex, diapers and paper towels; and, I also expect that consumers will still be purchasing such products. That is a valuable investment.
Disclosure: I am long KMB.