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Shares of Kimberly-Clark Corporation (KMB) have steadily returned 21.62% over the past 12 months. At $84.93 per share, the stock is trading very close to its 52-week high of $88.25 achieved in July. Even after the solid run-up, Kimberly-Clark's dividend yield remains decent at 3.5%, making it one of the most popular dividend stocks among investors. Should you ride on the recent upward momentum?

I am of the perspective that the investment still has a solid margin of safety, given its reasonable valuation and sustainable dividend yield. My view is based on the following five reasons:

1. Kimberly-Clark is priced reasonably relative to the company's financial fundamentals (see table below). Analysts in average predict KMB's revenue, EBITDA, and EPS to rise by 2-year CAGRs of 2.0%, 5.1%, and 17.6% over the current and next fiscal years.

Although the revenue estimate is slightly off from the average of 2.5% for a peer group consisting of KMB's comparable companies such as Procter & Gamble Co. (PG) and Colgate-Palmolive Co. (CL), both KMB's EBITDA and EPS growth estimates are significantly above the averages.

However, Kimberly-Clark has demonstrated a weak profitability, as almost all of its margin and capital return measures are below the peer averages, with only the LTM ROE outperforming the group substantially. The company assumes a relatively low leverage as reflected by its lower debt to capitalization and debt to EBITDA ratios.

In terms of liquidity, KMB's LTM free cash flow margin of 8.9% is lower than the group average at 11.4%. Due to the weak profitability margins, the firm's interest coverage ratio is again below the average. But KMB is able to maintain a fairly liquid balance sheet, which is suggested by both the above-average current and quick ratios.

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On a valuation perspective, KMB stock should be trading at a valuation discount so as to account for the firm's relatively weak profitability and free cash flow position.

Based on my model, the current stock price of $84.93 actually implies a fair average valuation discount of 10% to the three peer-average trading multiples (EV/EBITDA, P/E, and EV/FCF, and assuming they are equally weighted in determining the stock value) (see table above), suggesting the stock is reasonably priced.

In addition, KMB's PEG is standing at 1.9x. Although it appears overvalued on an absolute basis, but compared to the peer average of 2.3x or 21% above, the stock should be fairly priced at the current level to the firm's growth potential given its relative financial conditions.

2. On top of the fair valuations, the stock has a solid dividend yield of 3.5%. KMB's management appears to have a strong commitment to the dividend policy as annual dividend per share has been steadily raised by a 10-year CAGR of 10% from $1.12 in FY2001 to $2.80 in FY2011 (see chart below).

3. In addition, the current dividend level also appears to be safely backed by the firm's free cash flows (see chart below). Over the past decade, annual dividend paid generally represents a portion of the annual free cash flow generated, indicating that there are ample financial resources to maintain the current pace of dividend growth.

4. Argus Research has recently upgraded its rating for the stock to buy from hold with a target price at $92.

5. Kimberly-Clark's upward trend is supported by the stock's 100-day simple moving average (see chart below). The stock has recently touched the "floor' but successfully bounced back, and it looks like the 100-day SMA would continue to be a solid price support.

Bottom line, in the light of the fair valuation as well as the attractive and sustainable dividend yield, it is still worthwhile to acquire the stock at the current price.

Comparable analysis table is created by author, all other tables are sourced from Capital IQ, and all financial data is sourced from Capital IQ and Morningstar.

Source: Will Kimberly-Clark's Upward Momentum Continue?