Kimberly-Clark: Can You Please Pass Me A Kleenex?

Summary

Kimberly-Clark has been a consistent performer from both a dividend growth and total return perspective over many years.

Recently, management has taken steps through restructuring and the spin-off of Halyard Health, Inc. to increase profitability and shareholder value.

With its global footprint and consumer products focus, Kimberly-Clark should continue to provide steady dividends to shareholders.

Based on a DCF analysis, the company will need to continue to grow cash flow in the high single digits for the company to be attractive at the current price.

Company Overview


Kimberly-Clark (NYSE:KMB) is one of the largest consumer product companies based in the U.S. and was founded in 1872. The company's products are primarily in the paper and personal care products space and include well-known brands such as Kleenex, Huggies, Pull-Ups and Cottonelle. The company is global in nature, with operations in over 175 countries and over 50% of sales from international locations. Over the past year, the company's stock has traded in a range of $103/share to $123/share.

KMB's products are focused on everyday needs of consumers in developed and developing countries. The product lineup includes basic items such as paper towels, toilet paper, and diapers. Since these products are used no matter the economic environment, the company has seen very consistent financial performance over the long term.

In many categories, the company competes with Procter & Gamble (NYSE:PG) on a global basis. In tissues, diapers, and toilet paper, the two companies have significant share of the branded products available to consumers. With these products, the company has a fairly significant "moat" with its primary competitor, allowing for stable and consistent profitability.

A major risk is that the company's primary customer is Wal-Mart (NYSE:WMT), which accounts for approximately 14% of sales. Recently, Wal-Mart has been asking its vendors for larger discounts on products as it re-invests in its employees. However, unless consumers want to "trade-down" to generic brands, KMB and PG have the ability to keep pricing stable, relying on brand loyalty of their consumers.

Operating Performance

Over the past 5 years, total sales have grown modestly (excluding results of Halyard Health, Inc. spin-off).

(Source: Kimberly-Clark 10-K filings)

Operating income has been inconsistent over the past five years (excluding results of Halyard Health, Inc. spin-off).

(Source: Kimberly-Clark 10-K filings)

Similar to operating income, earnings per share has been inconsistent and range-bound over the past five years (excluding results of Halyard Health, Inc. spin-off).

(Source: Kimberly-Clark 10-K filings)

Shareholder Performance

Over long periods of time, KMB has had solid stock returns with lower overall risk (beta) than the entire stock market.

From a Dividend Growth Investor's perspective, KMB has a current yield of 2.9% and has seen a CAGR of 7% in the dividend per share over the past five years. The company adequately covers its dividend from cash flow from operations and does not take on debt to pay out the dividend.

(Source: Kimberly-Clark 10-K Filings)

From a Total Return Investor's perspective, KMB has returned 107% over the past five years with 23% of the return from dividends and 84% from price appreciation of the stock.

The return on a $10,000 initial investment would be:

(Source: Yahoo Finance, Beacon Lane Advisors Calculation)

Capital Management

One of the key attributes that is important to monitor is how management uses its Free Cash Flow (FCF) from the business for the benefit of its shareholders (FCF is defined as Cash Flow from Operations less Capital Expenditures).

(Source: Kimberly-Clark 10-K Filings, Beacon Lane Advisors Calculation including results of Halyard Health, Inc.)

Based on the free cash flow, Kimberly-Clark has the ability to use the excess cash for payment of dividends, share repurchases, payment of debt or acquisitions.

Over the past 5 years, management has used the FCF for the benefit of shareholders in the form of both dividends and share repurchases.

(Source: Kimberly-Clark 10-K Filings, Beacon Lane Advisors Calculation)

The repurchase of shares by the company has decreased the overall share count through the deployment of excess cash.

(Source: Kimberly-Clark 10-K Filings)

From a capital management perspective, one area of concern is that KMB is spending a greater amount of cash in the combination of dividends and share repurchases than it is accumulating through its free cash flow.

(Source: Kimberly-Clark 10-K Filings, Beacon Lane Advisors Calculation)

Over the past five years, the combination of the spending in excess of Free Cash Flow on dividends, share purchases, acquisitions and other investments has been financed through the additional issuance of debt and other sources of cash. Based on this, there may be less financial flexibility in the future if there is a recession or if interest rates rise when the company is required to re-pay or re-finance its debt.

(Source: Kimberly-Clark 10-K Filings, Beacon Lane Advisors Calculation)

The amount of net debt the company owes has grown in excess of $1.5 billion over the past 5 years, even while maintaining stable (not growing) operating cash flow.

(Source: Kimberly-Clark 10-K Filings, Beacon Lane Advisors Calculation)

Valuation

Under a simplistic valuation, KMB has a forward Price/Earnings (P/E) multiple of 19.5x and has an estimated EPS growth rate of 7.9% annually (Source: Yahoo Finance).

Using a more sophisticated unlevered discounted cash flow analysis, the company's stock has a range of values (price per share) based on the general assumptions below:

(Source: Beacon Lane Advisors Calculation)

Investor Considerations

Looking forward, Kimberly-Clark has many positive trends going for it. As developing countries evolve, there is a greater propensity to use basic products such as tissues, diapers, and other paper products in everyday life. Today, one in four people on earth use a Kimberly-Clark product on a daily basis. On a global basis, the company is planning to grow by focusing its developing and emerging international operations in China, Eastern Europe and Latin America.

Internally, the company continues to reduce its cost structure and in October of 2014 announced a re-organization that would eliminate 1,100 to 1,300 salaried employees. Also, in October of 2014, the company distributed shares of its healthcare products division, Halyard Health, Inc., to shareholders to allow the company to focus on its existing consumer products divisions.

From a capital management perspective, the company focuses on providing consistent returns to shareholders in the form of both dividends and share repurchases. At the current time, the company is taking on additional debt to fund share repurchases that may cause issues going forward.

An area of risk relates to the international nature of the business. With over 50% of sales outside the U.S., the strong dollar has created headwinds for the business. In Q3 2015, the company's sales declined by 6.7%, which was primarily caused by currency translations. Overall, volume was up 5%, while the currency impact caused sales to decline by 12%. Over the past year as the dollar has strengthened, this has been a major impact on the company. If the Federal Reserve increases rates, it is widely expected that the dollar will continue to strengthen, creating additional headwinds for the company.

Conclusion

Kimberly-Clark is a well-managed company that has rewarded shareholders over long periods of time with both dividends and share repurchases. The company's stock is a consistent performer with solid returns over many years.

From a Dividend Growth Investor's perspective, the company has adequately covered the dividend per share from free cash flow from operations. The current yield of 2.9% is solid, but lower than some competitors in the consumer packaged goods space.

From a Total Return Investor's perspective, the company has historically had a combination of a reasonable growing dividend plus capital appreciation at a lower risk than the overall market. In total, the company has outperformed the S&P Index.

(Source: Kimberly-Clark Investor Presentation September 2015, Comparative Returns July 2003 to September 2015)

At the current price of $120/share, we believe the company is slightly overvalued and would wait for either an improvement in financial performance or decline in the stock price prior to purchasing shares.

Disclaimer

The opinions in this article are for informational and educational purposes only and should not be relied upon for making individual investment decisions. The information in the article is believed to be accurate, however it may contain errors and omissions. We do not recommend that individuals act upon investment information without consultation of an investment advisor. We currently are long KMB in our investment portfolios.

Disclosure: I am/we are long KMB.

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.

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