'FANG,' Meet Your Low-Volatility Cousin: 'ROCK' - Part 4

Summary

I created a group of stocks with low volatility using the acronym "ROCK".

Each selection has low volatility, a higher dividend yield than the S&P 500, and a long history of dividend growth, and has outperformed the S&P 500.

This is part 4, where I focus on the "K" in "ROCK" and do an overview of ROCK.

This is the fourth and final article in my series covering my new group of low-volatility stocks collectively known by the acronym "ROCK". As I noted in my first article, I selected stocks using a number of fundamental factors like low volatility, dividend size and dividend growth. Specifically, to be considered for my group, the stock must be classified as low volatility, have a dividend yield higher than the S&P 500, and have at least 10 consecutive years of dividend increases. In addition to those criteria, potential candidates must have outperformed the S&P 500 over the last one-, three and five-year periods.

Part 1: The "R" in Rock: Raytheon (NYSE:RTN)

Part 2: The "O" in Rock: Realty Income (NYSE:O)

Part 3: The "C" in Rock: Clorox (NYSE:CLX)

Kimberly-Clark: The "K" in "ROCK"

Kimberly-Clark (NYSE:KMB) manufactures a wide range of essential consumer staples products that are used daily by everyone. As you can see in the image below, Kimberly-Clark has some of the most popular brands for essential consumer staples, which include toilet paper, diapers, Kleenex, feminine hygiene products, paper towels, etc. Like my previous selection of Clorox, Kimberly-Clark has a very stable business because its products are widely used and well known.

Kimberly-Clark Investor Presentation

As you can see in the charts below, Kimberly-Clark is a diversified company with its largest and most profitable segment being its personal care products. In addition to being diversified by product category, KMB is also diversified geographically with sales being split 50/50 between North America and outside North America. This does open Kimberly-Clark up to foreign currency risk as was shown in the previous earnings report where sales were impacted by 7% because of the impact of currencies.

Click to enlarge

Kimberly-Clark Investor Presentation

Kimberly-Clark Investor Presentation

Performance Data Table

One-Year Return

Three-Year Return

Five-Year Return

SPY

0.24%

39.27%

80.54%

KMB

25.62%

60.63%

145.19%

Click to enlarge

Data in table is total return, from dividendchannel.com

Kimberly-Clark's performance during worst stock market days

Since the beginning of 2015, there have been 11 days where the S&P 500 has fallen at least 2%. The average performance of the S&P 500 was down 2.58% vs. down 1.74% for Kimberly-Clark. Out of those 11 big down days for the S&P 500, Kimberly-Clark outperformed 10 out of the 11 days, therefore, KMB has shown to be a place where investors can look to for safety on big down days in the market.

Date

% Return

Date

% Return

SPY

6/29/2015

-2.10%

KMB

6/29/2015

-1.65%

SPY

8/20/2015

-2.09%

KMB

8/20/2015

-1.14%

SPY

8/21/2015

-3.11%

KMB

8/21/2015

-2.31%

SPY

8/24/2015

-4.09%

KMB

8/24/2015

-4.51%

SPY

9/1/2015

-2.98%

KMB

9/1/2015

-2.35%

SPY

9/18/2015

-2.14%

KMB

9/18/2015

0.01%

SPY

9/28/2015

-2.51%

KMB

9/28/2015

-1.74%

SPY

12/18/2015

-2.36%

KMB

12/18/2015

-1.83%

SPY

1/7/2016

-2.40%

KMB

1/7/2016

-1.67%

SPY

1/13/2016

-2.49%

KMB

1/13/2016

-0.53%

SPY

1/15/2016

-2.12%

KMB

1/15/2016

-1.45%

Average

-2.58%

Average

-1.74%

Click to enlarge

Kimberly-Clark Dividend

Currently, shares of Kimberly-Clark have a 2.75% yield, which is modestly higher than the 2.07% yield on the S&P 500. With 44 consecutive years of dividend increases, KMB is one of the best and safest dividend-growth stocks in the market. To be able to increase the divided year after year, through many different economic environments, speaks to the underlying strength of the business and its leading brands.

Dividend Growth Potential

As you can see in the table below, Kimberly-Clark has a weighted dividend growth rate of 7.40%, and I expect the dividend to continue growing over the next five years. To determine if that rate of dividend growth is sustainable over the next five years, I conducted an analysis to see if dividends paid as a percentage of CFFO came in lower than my self-imposed threshold of 80%. For my calculations, I used the dividend growth rate of 7.40% and used projected long-term growth data from Zacks. The table below shows if Kimberly-Clark continues growing its dividend at its current pace, that it will continue to be well below my 80% threshold. Based on my estimates, by 2020, Kimberly-Clark could be paying an annual dividend of $4.90/share or about $1.22/quarter, which is 33.05% above the current quarterly dividend.

Div Growth Rate

Weight

Div Rt*Weight

5 Yr

7.01%

20.00%

1.40%

3 Yr

6.42%

30.00%

1.93%

1 Yr

8.14%

50.00%

4.07%

Weighted Dividend Growth Rate

7.40%

Current Quarterly Dividend

0.92

Shares Outstanding

363.4

LT Growth Est. (Zacks)

7.26%

Calendar Year

Est. Div/Share

Shares

Divs $ Paid

Proj. CFFO

Proj. Div as % of Net Inc.

2016 est.

3.68

363.4

1337.31

2473.42

54.07%

2017 est.

3.95

363.4

1436.27

2652.99

54.14%

2018 est.

4.24

363.4

1542.56

2845.59

54.21%

2019 est.

4.56

363.4

1656.71

3052.18

54.28%

2020 est.

4.90

363.4

1779.30

3273.77

54.35%

`

2020 Div

4.896

2020 Quarterly

1.224

Current Quarterly

0.920

% Dividend Upside

33.05%

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ROCK Overview

Today is a great example of how ROCK can perform on a big down day because of the Brexit. At the time of writing this article, the performance of each component of ROCK compared to the S&P 500 shows that each is outperforming by a wide margin, and as a group, on average, is having a great day considering what the rest of the market is doing. In addition, it is not just on the bad days that ROCK performs well, as the chart below shows, over the last 10 years, an equal weighted portfolio of ROCK has destroyed the S&P 500. The reasons for this outperformance are the current economic environment we are in and low treasury yields. All four components of ROCK are built to outperform during the environment we are in because they are stable, have a good yield, and offer products that are necessities for consumers, governments, etc.

- Governments are not going to stop spending on missile defense; just today Raytheon won a contract to upgrade the Patriot Missile systems for Kuwait.

- For Realty Income, its top tenants are stores like Walgreens (NASDAQ:WBA) and dollar stores, which are economically insulated because regardless of what goes on around the world, consumers still need their prescriptions, and consumers will continue to shop at dollar stores because of the economic environment we are in.

- Consumers still need bleach and other cleaning products, pet products like cat litter and Brita water filters for clean drinking water. This makes Clorox one of the most stable companies because of the wide range of products it most likely has throughout your entire house.

- For Kimberly-Clark, no matter the economy, consumers need toilet paper, paper towels, diapers and many of the other products that it manufactures. Like Clorox, Kimberly-Clark has one of the most stable businesses because it focuses on essential consumer staples products.

ROCK Performance Today

RTN

-0.22%

O

+2.39%

CLX

+1.22%

KMB

-1.32%

Average

+0.52%

S&P 500

-3.16%

Click to enlarge

Click to enlarge

Google Finance

Closing Thoughts

In closing, Kimberly-Clark is the fourth and final selection of my group of "ROCK" stocks that have low volatility, a high dividend, a history of dividend increases and have outperformed the S&P 500 over the last one, three and five years. As has been shown today in the Brexit aftermath, "ROCK" can be a place to look for safety during large down days in the market.

Disclaimer: See here.

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.