- Kimberly-Clark is a respectable name in the consumer staples space, with growing market share in key geographies.
- While it has some near-term headwinds, these issues are expected to ease in the latter part of this year.
- Meanwhile, KMB maintains a strong balance sheet and is poised to be a Dividend King shortly.
Not all stocks are created equal and nor do they have to be. Some are higher risk, and carry the potential for bigger capital gains, while others provide lower volatility and can therefore introduce more stability to a portfolio.
This brings me to Kimberly-Clark (NYSE:KMB), which belongs to the more stable consumer staples space. It isn’t the cheapest name, but is far from being the most expensive among its peers. In this article, I highlight what makes KMB a sound Buy for sleep-well-at-night type returns, so let’s get started.
Why KMB Is A Buy
Kimberly-Clark isn’t necessarily a household name, but its brands certainly are, and are used by people in more than 175 countries. It’s been in existence for an impressive century-and-half and its family of products include Kleenex, Huggies, Scott, Kotex, Depend, and Pull-ups, to name a few. Its top 5 brands generate over $1B in annual sales each, and hold No. 1 or No. 2 positions in 80 countries. In the trailing 12 months, KMB generated nearly $19 billion in total sales.
One of the reasons for owning KMB is the stability that it can introduce to a portfolio. This is reflected by KMB’s low Beta score, which can help investors weather through tumultuous economic times relatively unscathed with respect to the rest of the market. As seen below, KMB carries a Beta score range that’s mostly trended in between 0.25 – 0.75 over the 3 years, including the volatile pandemic timeframe.
It's no secret that KMB has struggled to grow its top-line this year, as it faces a difficult comparable against significant volume growth last year due to the pandemic. It is reflected by organic sales declining by 3% YoY during the second quarter. For the full-year 2021, management now guides for 0-2 percent organic sales decline compared to the previous guidance for 0 to 1% sales growth.
On top of that KMB faces challenging commodity inflation, with a significant 30% increase in the price for pulp in North America, and more than a 90% increase in resin prices. It’s not realistic for KMB to raise prices in such manner to fully offset these costs, given their significant increase and volatility. As such, analysts expect a decline in KMB’s bottom-line this year, with a 13% decline in estimated EPS this year.
While the short-term picture does not appear to be rosy. I do see reasons to be optimistic around KMB in the long-term. This is considering that KMB’s brand investments are paying off, with market share gains in key countries. As seen below, KMB managed to grow market share for its strong Huggies diapers and Kotex feminine care brands in key countries, and Huggies is now the #1 diaper in China.
(Source: investor presentation)
As with any consumer staples company, marketing and brand engagement is key. It appears that management is effectively executing on this front. As noted by CEO Mike Hsu during Barclay’s global consumer staples conference last month, the company has increased its media investment over the past 3 years, and 70% of its media is now digital, which helps KMB to improve targeting and personalization, resulting in “significantly improved ROI.”
In addition, CFRA shares a favorable outlook for the company, as it believes near-term challenges will ameliorate in the second half of this year, as noted below in its recent analyst report:
We believe KMB’s results will get sequentially better as the company increased list prices in North America late in Q2. We expect these pricing actions, along with productivity savings, to result in sequentially stronger earnings over the next few quarters. We also expect KMB’s professional business, which focuses on solutions for workplaces, to gain momentum in 2H 2021.
Meanwhile, KMB maintains a strong A rated balance sheet, with $306 million in cash on hand, and a net debt to EBITDA ratio of 2.3x, sitting well below the 3.0x safe level that I use. It’s also worth noting that KMB is nearly a Dividend King, with an impressive 49-year track record of consecutive annual raises. It currently pays a healthy 3.5% dividend yield, with a reasonable 68% payout ratio (for a consumer staples company), and a 5-year dividend CAGR of 4.3%.
I see value in KMB at the current price of $132, with a forward PE of 19.6. This is considering the strength of KMB’s brands, increasing market share, and my belief that the company can weather through the near-term commodity inflationary pressures. Analysts estimate 5-12% annual EPS growth over the next 2 years, and have an average price target of $138. Additionally, CFRA has a higher 12-month price target of $142.
(Source: Seeking Alpha)
Kimberly-Clark is a respectable enterprise in the consumer staples space, and is seeing its brand investments pay off, with market share growth in key geographies. While it has some near-term headwinds, I believe these issues will eventually ameliorate, and analysts expect sales to begin a positive reversal during the latter part of this year. I continue to see value in KMB and its dividend yield at the current price, and view it as a sound Buy for long-term income and growth.
This article was written by
I am Gen Alpha. I have more than 14 years of investment experience, and an MBA in Finance. I focus on stocks that are more defensive in nature, with a medium- to long-term horizon.I provide high-yield, dividend growth investment ideas in the investing group Hoya Capital Income Builder. The group helps investors achieve dependable monthly income, portfolio diversification, and inflation hedging. It provides investment research on REITs, ETFs, closed-end funds, preferreds, and dividend champions across asset classes. It offers income-focused portfolios targeting dividend yields up to 10%. Learn more.
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