Kimberly-Clark And Its Real Value

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About: Kimberly-Clark Corporation (KMB)
by: Grant Gigliotti
Summary

Kimberly-Clark sells well-known paper products in 175 countries.

At first glance, it seems like a perfect consumer staple stock to own.

In recent years, organic growth has slowed, the company faces fierce competition from Procter & Gamble’s Pampers brand, and foreign exchange rates have hurt the company’s fundamentals.

Is this company still a solid play for long-term dividend investors?

Factual evidence tells about the real value vs. stock price.

Kimberly-Clark (KMB) is a top manufacturer of products made from paper and fiber materials. About 50% of sales come from personal care products, and about 33% of sales come from tissue products. It has several widely-recognized brands in its portfolio, including Huggies, Pull-Ups, Depends, Kotex, Kleenex, and Cottonelle. The company also operates K-C Professional, which provides safety and sanitary products for the workplace.

The company sells about half its products in North America and the rest of the products are sold in Asia, Latin America, and about 10% in Europe.

On the surface, Kimberly-Clark seems like a good investment since it offers staple consumer products that should continue to sell even during an economic downturn. The brands it sells are well-known and the company is diversified through various types of products and through global sales.

But this article will dig deeper into the fundamentals and facts. We’ll weigh out the pros and cons to reveal if this is actually a good company to invest in, and if it’s at a good price when compared with the stock’s real value.

Snapshot of the Company

A fast way for me to get an overall understanding of the condition of the business is to use the BTMA Stock Analyzer’s company rating score. It shows a score of around 83/100. Therefore, Kimberly-Clark is considered to be a good company to invest in, since 70 is the lowest good company score. KMB has high scores for 10 Year Upward Price Per Share, ROE, Ability to Recover from a Market Crash or Downturn, ROIC, and Gross Margin % score. It has mediocre scores for Earnings per Share. It has a low score for PEG Ratio which indicates that the company may not be experiencing high growth consistently over the past 5 years. In summary, these findings show us that KMB seems to have above-average fundamentals since the majority of categories produce good scores.

Before jumping to conclusions, we’ll have to look closer into individual categories to see what’s going on.

(Source: BTMA Stock Analyzer)

Fundamentals

Let’s examine the price per share history first. In the chart below, we can see that price per share has been mostly consistent at increasing over the last 10 years, with the exception of the past 2 years where share price has slightly declined. Overall, share price average has grown by about 99.8% over the past 10 years or a Compound Annual Growth Rate of 7.99%. This is a decent return, but nothing spectacular.

(Source: BTMA Stock Analyzer – Price Per Share History)

Looking closer at earnings history, we see that earnings growth has grown overall in the 10-year period, but it has not experienced consistent growth. In reality, the earnings have been volatile and difficult to predict. Inconsistent earnings make it more difficult to accurately estimate the future growth and value of the company. So KMB is not a great candidate of a stock to accurately estimate future growth nor current value.

(Source: BTMA Stock Analyzer – EPS History)

Since earnings and price per share don’t always give the whole picture, it’s good to look at other factors like the gross margins, return on equity, and return on invested capital.

The return on equity has been extremely volatile over the last five years. Five-year average ROE is very good at around 331%, but I would not rely on this data as being an accurate representation of the company’s average ROE, since the numbers have been so erratic. It would be a good idea to look into what has been causing the extreme volatility of ROE before deciding to invest in this company.

(Source: BTMA Stock Analyzer – ROE History)

Let’s compare the ROE of Kimberly-Clark to its industry. The average ROE of 20 Paper/Forest Product companies is 8.45%.

The average ROE of 141 Household Product companies is 13.42%.

Therefore, Kimberly-Clark’s 5-year average of 331.9375% and current ROE of 864.52% are well above the competition.

But since the ROE readings for Kimberly-Clark have been so unpredictable, I would take this information with a grain of salt.

Return on Invested Capital

I’m interested in consistent ROIC and ROE of 16% or more, so KMB is meeting my terms in this area with ROIC and ROE of above 16%, but it’s not meeting my requirements in terms of consistency. Therefore, this discourages me from wanting to invest in a company with such inconsistencies.

(Source: BTMA Stock Analyzer – Return on Invested Capital History)

Kimberly-Clark’s Gross Margin Percent history shows that margins have been at good levels, and have been increasing over 4 of the past 5 years. Gross Margin levels have remained between 33% and 37%. I typically look for companies with gross margin profits consistently above 30%. So KMB has met my requirements in this area.

(Source: BTMA Stock Analyzer – Price Per Share History)

Looking at other fundamentals involving the balance sheet, we can see that the debt-to-equity shows no number, indicating that this company might not have any long-term debt to speak of (This would be a very good sign). But when we look closer at KMB, we see that the company’s long-term debt for the quarter that ended in Sep. 2018 was $1,786 million, while the stockholders' equity was $-133 million. Therefore, this is very bad.

KMB’s Current Ratio of .78 is also not good, indicating that it doesn’t have enough assets to pay its current liabilities.

According to the balance sheet, the company seems to not be in good financial health.

The Price-Earnings Ratio of 24.8 indicates that KMB might be selling at a high price when comparing KMB’s PE Ratio to a long-term market average PE Ratio of 15. The 10-year and 5-year average PE Ratio of KMB has typically been between 19.7 and 22.2, so this indicates that KMB could be currently trading at a high price when comparing to KMB’s average historical PE Ratio range.

KMB currently pays a dividend of 3.54% (or 3.43% over the last 12 months).

(Source: BTMA Stock Analyzer – Misc. Fundamentals)

The Story Behind The Dividend

In regards to dividend history, I’m first interested in knowing if the payout ratio is sustainable. At this time it’s around 86.49%, which means that there isn’t much room to grow the dividend. Also notice that KMB has bought back shares in 2015-2018, which contributes to higher payout ratios in those years.

If we look only at the dividend yield, we see a range of 2.7% to 3.51%. This stock pays out a decent dividend, and though dividend payouts have increased overall in the 5-year period, the dividend yield increases have not been consistent year over year, but they have remained stable. Therefore, this stock may not be desirable for investors who want a significant dividend yield that is consistently increasing year over year.

Although KMB participates in share buybacks, sometimes buybacks don’t make sense, as according to Warren Buffett: “There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds -- cash plus sensible borrowing capacity -- beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated.”

In the example of KMB, the company appears not to have ample cash as indicated by its poor debt-to-equity ratio and current ratio. Now let’s consider its borrowing capacity.

Because of KMB’s overleveraged situation, this decreases the company’s borrowing capacity.

Now to see if the buyback timing made sense. From the view of a share price chart over the past 5 years, the worst times to do share buybacks would have been when KMB was climbing highest in stock price. This would have been around 2013, 2014 and 2017. If we look at the dividend chart above, we can see that during 2015 and 2017 was a time when KMB was buying back shares. Therefore, it seems like KMB hasn’t done a great job of returning value to shareholders through share repurchases because they have executed the buybacks when the stock had a worse chance of selling below its intrinsic value. Since KMB has bought back stocks on a regular yearly basis, it appears that they are not purposely planning their share buybacks wisely.

If I were currently interested in buying KMB now for the dividend, I would be trying to buy when the dividend yield was highest relative to its past. From the chart below, we can see that the dividend yield is near a lower mid-point relative to the past 10 years. Therefore, it’s not an exceptional time to buy now if my priority is a better than average return through dividends.

Overall, the dividend situation with KMB is worse than average. First of all, the dividend per share has been growing consistently year over year during the past 5 years. The payout ratio shows that the dividend is nearing a point where it will become unsustainable. Share buybacks haven’t been completed at an opportune time to return value to shareholders. The dividend yield is at a low point when compared to the past 10 years.

On the positive side, the stock pays a decent dividend.

This analysis wouldn’t be complete without considering the value of the company vs. share price.

Value Vs. Price

For valuation purposes, I will be using a diluted EPS of 4.59. I’ve used various past averages of growth rates and PE Ratios to calculate different scenarios of valuation ranges from low to average values. The valuations compare growth rates of EPS, Book Value, and Total Equity.

In the table below, you can see the different scenarios and in the chart, you will see vertical valuation lines that correspond to the table valuation ranges. The dots on the lines represent the current stock price. If the dot is towards the bottom of the valuation range, this would indicate that the stock is undervalued. If the dot is near the top of the valuation line, this would show an overvalued stock.

(Source: Wealth Builders Club)

According to this valuation analysis, KMB is overpriced. Almost all categories indicate overpriced.

  • If KMB continues with a growth average similar to its past 10 years' earnings growth and past 10 years' book value growth, then the stock is overpriced at this time.
  • If KMB continues with a growth average similar to its past 5 years' earnings growth, then the stock is fairly priced at this time.
  • If KMB continues with a growth average similar to its past 5 years' book value growth, then the stock is overpriced at this time.
  • According to KMB’s typical P/E ratio relation to the S&P 500's P/E Ratio, KMB is overpriced.
  • If KMB continues with a growth average as forecasted by analysts, then the stock is overpriced.

This analysis shows an average valuation of around $75 per share versus its current price of about $117; this would indicate that Kimberly-Clark is overpriced.

Forward-Looking Conclusion

According to the facts, Kimberly Clark is not financially healthy in a long-term sense in having enough equity as compared with debt, nor in the short term because the current ratio indicates that it doesn’t have enough cash to cover current liabilities. Other fundamentals are erratic including ROE, ROIC, and EPS. The dividend situation is worse than average and the company fails to effectively return value to shareholders through share repurchases. Lastly, this analysis shows that the stock is overpriced.

Pros are a decent dividend yield and stable gross margin percent. Another pro is that this stock typically performs better than other stocks during down markets and recessions because people still tend to buy the company’s staple products, even during periods of recession. Below, we can see how KMB performed against the S&P 500 during the economic crisis of 2008 and years onward. You can see that KMB didn’t decline as much as the S&P 500 during 2008/2009.

Predicted Growth

“Over the next five years, the analysts that follow this company are expecting it to grow earnings at an average annual rate of 6.18%. This year, analysts are forecasting earnings increase of 7.41% over last year. Analysts expect earnings growth next year of 1.35% over this year's forecasted earnings.” (Source: KMB Forecast Earnings Growth)

If you invest today, with analysts’ forecasts, you might expect about 6.18% growth per year. Plus we’ll add the current 3.54% forward dividend. This brings the annual return to around 9.72%, and this is a best-case scenario.

Here is an alternative and unlikely scenario based on KMB’s past earnings growth. During the past 10- and 5-year periods, the average EPS growth rate was about 4.71% and 2.97%, respectively. Plus the average 5-year dividend yield was about 3.11%. So we’re at a total return of 7.82% to 6.08%.

But when considering cash flow growth over the past 10 and 5 years, the growth has been 2.91% and 0.54%, respectively. Plus the average 5-year dividend yield would give us a total return of 6.02% to 3.65%. Therefore, our annual return could likely be around 6-7%, or less than this amount in certain years.

If considering actual past results of Kimberly-Clark, which includes affected share prices, and long-term dividend yields, the story is a bit different. Here are the actual 10- and 5-year return results.

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10-Year Return Results if Invested in KMB:

Initial Investment Date: 1/12/2009

End Date: 1/12/2019

Cost per Share: $48.46

End Date Price: $117.20

Total Dividends Received: $32.48

Total Return: 207.76%

Compound Annualized Growth Rate: 12%

_______________

5-Year Return Results if Invested in KMB:

Initial Investment Date: 1/12/2014

End Date: 1/12/2019

Cost per Share: $100.50

End Date Price: $117.20

Total Dividends Received: $18.44

Total Return: 34.43%

Compound Annualized Growth Rate: 6%

_________________

From these scenarios, we have produced results from 6% to 12%. I feel that if you’re a long-term patient investor and believer in KMB, willing to sweat through the volatile earnings of Kimberly-Clark, you could expect KMB to provide you with around at least 6-8% annual return if you wait for the right time to sell. For the short-term swing trader or impatient investor, the risk seems more than the potential return, especially if you’re not holding long enough to collect a full year’s dividend payment.

As a comparison, the S&P 500’s average return from 1928 – 2014 is about 10%. So in a typical scenario with KMB, you could expect to earn a lower return result as compared with an S&P 500 index fund. In a worst-case scenario, you are still likely to return much lower than the average S&P 500 index fund return.

For me, the choice is certain. I would take an objective look at this company and realize that Kimberly-Clark is not worth the risk for me. There are plenty of other companies that offer a greater return potential with more consistent fundamentals, while being offered at a better price when compared with the estimated value of the company.

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.