“Toilet paper and Diapers”, was his reply as he laughed and stated that toilet paper is fast becoming a status symbol in China and other emerging economies in the east. “You need to take a look at Kimberly Clark (KMB), SCA, and Proctor & Gamble (PG).”
This was the result of a conversation I had the other day with a long time friend who is in a unique position within the paper industry from which to discuss its future. For many years he made his living selling potato starch to paper mills and over time became the go-to guy for marketing in that particular niche market. He is presently consulting for a German firm. His travels with this industry have taken him to the countries of Germany, Mexico, Brazil, Saudi Arabia, and China among others. Germany, he says, is a model of efficiency, Saudi Arabia spares no expense when gearing up for a relatively new industry, and China is a tough market to crack due to issues related to axle grease.
Business ethics aside, I found the prospects of supplying paper to China a compelling investment proposition. My first inclination was that corrugated and liner material for boxes would be where the money is due to the expansion of the internet trade and folks ordering things online and having them shipped via UPS or Federal Express in boxes. However, this is not the case. In fact, my friend informed me those markets are actually shrinking.
I inquired as to whom the key manufacturers are in the expanding side of the business, otherwise known to the paper industry as the tissue market. I was surprised to learn that there are only three dominate players left in the United States: Kimberly Clark, Proctor & Gamble, and Georgia Pacific. The other major player is SCA out of Scandinavia. During the 1990s the industry went through an extreme period of consolidation as many types of paper products were commoditized throughout the third world. Georgia Pacific actually sold off many of its mills in order to concentrate on the tissue market a couple of years back. Kimberly Clark has done the same. According to Kimberly Clark’s 2010 annual report:
On January 21, 2011, we initiated a pulp and tissue restructuring plan in order to exit our remaining integrated pulp manufacturing operations and improve the underlying profitability and return on invested capital of our consumer tissue and K-C Professional businesses. The restructuring is expected to be completed by the end of 2012 and will involve the streamlining, sale or closure of 5 to 6 of our manufacturing facilities around the world. In conjunction with these actions, we will be exiting certain non-strategic products, primarily non-branded offerings, and transferring some production to lower-cost facilities in order to improve overall profitability and returns.
Georgia Pacific is now owned by Koch Industries and remains a private company. SCA trades on the pink sheets as OTCPK:SVCBY. That leaves us with Kimberly Clark and Proctor & Gamble as the U.S. based investment vehicles in this market. Proctor & Gamble, with brands such as Bounty, Charmin, and Pampers commands a leadership role in the U.S. market, but is not a significant worldwide player, though they are making inroads into Africa.
With brands like Kleenex, Cottonelle, and Scott, and combined sales in this arena of $15.2 billion dollars in 2010, Kimberly Clark now appears to be poised to become king of the tissue market. Profit margins in their key four market segments range from 10.2% to 20.3%, and their brands overall command the number 1 or 2 market share spots in 80 of the 150 or so countries they do business in. Interestingly enough, Kimberly Clark has been in China since 1994, but their current focus is on Latin America, Eastern Europe and the rest of Asia.
The company has a dividend payout of 4%, and an annual 10% dividend growth rate. They also have an active share buy-back plan in place, which is good for investors. They purchased $800 million worth of stock in 2010 and will purchase up to $1.5 billion this year.
Kimberly Clark is a stock that is worthy of assuming a key position in most portfolios, especially for those building retirement portfolios. With the rapid world population growth and economic expansion of China and India, the projected growth rate of this company may be a bit on the conservative side, especially as these regions build out a middle class and as consumers move up the value chain in the tissue market. Management attempts to achieve a 3-5% top line growth rate but has managed in the last five years to hit the higher end of this number.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.