Kimberly-Clark Corporation is Still Over-Valued

Continuing my quest for finding superior dividend paying stocks, I will be analyzing Kimberly-Clark Corporation (KMB) which trades on the NYSE. It is, of course, a member of the S&P 500 Dividend Aristocrats which means that it has raised its annual dividend over the last 25 consecutive years.

Company Profile:

From Yahoo Finance

Kimberly-Clark Corporation engages in the manufacture and marketing of health and hygiene products worldwide. It operates in four segments: Personal Care, Consumer Tissue, K-C Professional & Other, and Health Care. The Personal Care segment manufactures and markets disposable diapers, training and youth pants, and swim pants; baby wipes; feminine and incontinence care products; and related products. The Consumer Tissue segment manufactures and markets facial and bathroom tissue, paper towels, napkins, and related products for household use. The K-C Professional & Other segment manufactures and markets facial and bathroom tissue, paper towels, napkins, wipers and various safety products for the away-from-home marketplace. The Health Care segment manufactures and markets health care products, such as surgical gowns, drapes, infection control products, sterilization wrap, disposable face masks and exam gloves, respiratory products, and other disposable medical products.

KBM has a market capitalization of $30.36B.

Company Fundamentals:

The return on invested capital has been absolutely fantastic at Kimberly-Clark Corporation. Management has been able to consistently deliver ROIC in the high teens, low twenties. The 5-year average ROIC is 19%.

In addition, its return on equity has been even better! The 10-year average is 30.07%, and the 5-year average is 28.54%, which is very consistent. KMB’s capital is currently composed of 36% debt. Management has successfully used this debt to produce these ROE levels.

Now however, its equity growth rate has been quite the Jekyll and Hyde. KMB has had highs of 26% and lows of negative 12%. It seems to either have a high growth rate or a very low growth rate, with not much in between! Over the 10-year period, the equity growth rate has been 7.03%. Unfortunately, that drops down to 3.87% over the last 5 years.

Its earnings per share growth rate has been much more steady in the 4% range for almost the whole duration. There is not a great amount of EPS growth rate, but at least its consistent.

Its sales growth rate has also been consistent. However, it has improved from around 3% sales growth rate to 5% sales growth rate.

Dividend Fundamentals:

KMB currently delivers a dividend yield of 3.15%. That is better than you would receive from the S&P 500 Index or the DJIA.

And the dividend growth has been decent over the past 10 years at 8.49%. Over 5 years, the dividend growth rate has been 12.68% which is very nice, but unfortunately, in 2006, the dividend growth rate has dropped back down to 8.89%.

The dividend payout ratio has been increasing over the last 10 years from 38% to 50%. There is still room to increase this dividend payout ratio, but not a whole lot.

Like the sales growth rate, cash flow growth rate has been quite consistent in the 5% range.

Valuation Models:

Now it's time to figure out what this stock is worth by determining my 3 model prices.

From a dividend yield perspective, KMB is currently on sale. The 5 year average high dividend yield is 3.07%. However, the last 2 years have both had their high dividend yields beat that mark at 3.24% and 3.46%. In any case, assuming we demand a 3.07% yield, then the model price is $68.98 which is a 2.48% discount to the current price.

Benjamin Graham would argue that point since the Graham number works out to $34.75. That is a premium of almost 94%!

Once again, I have the same issue that I had with Consolidated Edison Corporation (ED). I have estimated a future EPS growth rate of 3.87% (from the 5 year equity growth rate that has been delivered to date). Now admittedly, that is quite a bit lower than the analysts forecast of 7.3%. But the issue comes in that I normally only assign a maximum P/E of double the future EPS growth rate. In this case, the P/E would be 7.73.

If I used the analysts forecast, then the P/E I would use would be 14.6. In either case, the stock comes out over valued. With my future EPS growth rate, the stock is selling at a premium of almost 300%! If I use the analysts’ forecast, then the premium is reduced to 50%.

See my KMB calculations here.

Here is the 1 year stock price chart:

Conclusion:

What can we say about KMB? Management has definitely been producing an excellent return on invested capital. Equity growth rate and EPS growth rates have been very low (under 4%). Dividend growth has been decent.

This company just does not jump out at me. And I feel that this stock is currently over- valued. Even by the dividend yield method since the last 2 years had delivered higher yields.

Just not enough on this stock to make me add it to the portfolio. What do you think?

Full Disclosure: I do not own any shares in KMB.