Kimberly-Clark Corporation (NYSE:KMB) produces and sells consumer staples, such as diapers, paper goods, and female personal care products. These are products with inelastic demand that will sell no matter what happens to the stock market or economy, which makes KMB a defensive pick going into this crazy year for the stock market. While the most recent earnings report showed slight declines in quarterly YoY revenue of 8% and earnings of 6%, this is yet another recent example of a large American corporation dealing with the challenges of currency headwinds from the strong dollar. When profits from products sold abroad are converted back into U.S. dollars, the results are weakened, since sales occur in a weaker local currency. But the business model is intact, and for long-term investors, the stock presents a good value proposition at the present time.
If we take a long-term approach, companies like KMB that sell consumer staples, and that are actually performing well abroad if you take out the currency headwinds, will reward investors significantly once the dollar finally begins to weaken, which, of course, is inevitable. The last couple of years have actually seen a record rise in the dollar relative to other currencies, which is mostly due to the timing of the U.S. recovery, while other economies throughout the world are struggling. This particular combination of macroeconomic factors is not permanent.
The stock trades at a forward P/E of only 18, which is a discount to the average P/E of the whole stock market, which is still near 20 even after the recent scary sell-off. And while this doesn't seem like a huge discount to the market average, KMB is anything but an average company, which makes this valuation conservative. This conservative valuation makes it attractive as we go into a volatile year where pundits have predicted stocks to go every which way imaginable, which means there is a great deal of uncertainty in the market generally. But there isn't much uncertainty about what will happen with KMB. The company will make a ton of money and will do even better if the economy goes into a recession, because investors will gravitate toward safety, and it doesn't get much safer than the leading company in the consumer discretionary space with products that have inelastic demand. Even with the so-called disappointing earnings report, the company still has $643 million in cash and an ROE of 28%.
The 2.78% dividend is a nice bonus to the stable underlying business model, and in combination, it makes for a very defensive long-term holding, especially at today's prices. History has shown that dividend-paying stocks tend to outperform their non-dividend paying counterparts over time if all dividends are reinvested, and this is even more true during bear markets. This is due to the fact that while other stocks are losing value at a rapid pace, investors flee to the safety of the dividend yield, which provides the one-two punch of bolstering the stock price because of the capital inflow and paying out cash at the same time.
So, while you may not get rich quick by buying shares of KMB, you are very unlikely to lose money over the long term and can collect the nice dividend no matter what happens. Going into the scary 2016 market with so much uncertainty, it makes sense to be defensive, and there aren't too many places in the market more defensive than a market leader of consumer staples that pays such a nice dividend.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.